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spk01: Good morning and welcome to the second quarter 2022 earnings conference call for DR Horton, America's Builder, the largest builder in the United States. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments after the presentation. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for DR Horton.
spk14: Thank you, Holly, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2022. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.L. 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.L. Horton on the date of this conference call and D.L. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.L. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.dlhorton.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 Auld, our president and CEO. Thank you, Jessica, and good morning.
spk18: I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our executive vice presidents and co-chief operating officers. and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team delivered an outstanding second quarter, highlighted by a 59% increase in earnings to $4.03 per diluted share. Our consolidated pre-tax income increased 60% to $1.9 billion on a 24% increase in revenues. And our consolidated pre-tax profit margin improved 520 basis points to 23.5%. Our home building return on inventory for the trailing 12 months ended March 31st was 40.3%, and our consolidated return on equity for the same period was 34%. These results reflect our experienced teams, the production capabilities, and our ability to leverage D.O. Horton's scale across our broad geographic footprint. Housing market demand remains strong despite the recent increase in mortgage rates, and we are focused on maximizing returns while continuing to aggregate market share. There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market. Our construction cycle times were extended further this quarter, and we continue to work on stabilizing and then reducing our cycle times to historical norms. After starting construction on 24,800 homes this quarter, Our homes and inventory increased 30% from a year ago, with only 600 unsold completed homes across the nation. With 33,900 homes in backlog, 59,800 homes in inventory, a robust lot supply, and strong trade and supplier relationships, we are well positioned for consolidated revenue growth of greater than 25% this year. We believe our strong balance sheet, liquidity, and low leverage position us to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our home building operations while managing our product offerings, incentives, home pricing, sales base, and inventory levels to optimize returns. Mike?
spk07: Earnings for the second quarter of fiscal 2022 increased 59% to $4.03 per diluted share compared to $2.53 per share in the prior year quarter. Net income for the quarter increased 55% to $1.4 billion compared to $930 million. Our second quarter home sales revenues increased 22% to $7.5 billion on 19,828 homes closed up from $6.2 billion on 19,701 homes closed in the prior year. Our average closing price for the quarter was $378,200, up 21% from the prior year quarter, while the average size of our homes closed was down 1%. Paul?
spk08: Our net sales orders in the second quarter decreased 10% to 24,340 homes. while the value increased 10% from the prior year to $9.7 billion. Our average number of active selling communities increased 1% from the prior year quarter and was up 4% sequentially. The average sales price of net sales orders in the second quarter was $400,600, up 23% from the prior year quarter. The cancellation rate for the second quarter was 16%, compared to 15% in the prior year quarter. New home demand remains very strong, despite the recent rise in mortgage rates. We are continuing to sell homes later in the construction cycle to better ensure the certainty of the home close date for our home buyers, with virtually no sales occurring prior to the start of home construction. We expect to continue managing our sales pace in the same manner for the rest of the year.
spk04: Bill? Our gross profit margin on home sales revenues in the second quarter was 28.9%. up 150 basis points sequentially from the December quarter. The increase in our gross margin from December to March reflects the broad strength of the housing market. The strong demand for homes combined with a limited supply has allowed us to continue to raise prices and maintain a very low level of sales incentives in most of our communities. On a per square foot basis, home sales revenues were up 4.8% sequentially, while stick and brick costs per square foot increased 2.5%, and our lot cost increased 2.8%. We expect our costs will continue to increase. However, with the strength of today's market conditions, we expect most cost pressures to be offset by price increases in the near term. We currently expect our home sales gross margin in the third quarter to be slightly better than the second quarter. Jessica.
spk14: In the second quarter, home building SG&A expenses a percentage of revenues with 6.8% down 80 basis points from 7.6% in the prior year quarter. This quarter, our home building SG&A expense as a percentage of revenues was lower than any quarter in our history, and we remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports our business. Paul?
spk08: We started 24,800 homes during the quarter, up 5% from the second quarter last year, bringing our trailing 12-month starts to 95,300 homes. We ended the quarter with 59,800 homes in inventory, up 30% from a year ago. 26,000 of our total homes at March 31st were unsold, of which only 600 were completed. Our average construction cycle times for homes closed in the second quarter increased by almost two weeks since our first quarter and over two months from a year ago. Although we have not seen improvement in the supply chain yet, We continue working to stabilize and then reduce our construction cycle times to historical norms.
spk07: Mike? At March 31st, our home building lock position consisted of approximately 570,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. 23% of our total owned lots are finished, and 47% of our controlled lots are or will be finished when we purchase them. Our large, capital-efficient lot portfolio is a key to our strong competitive position. Our second quarter home building investments in lots, land, and development totaled $2.1 billion, of which $1.2 billion was for finished lots, $630 million was for land development, and $260 million was to acquire land. Paul?
spk08: Four Star, our majority-owned residential lot development company, continues to execute well. During the second quarter, Four Star reported total revenues of $421.6 million and pre-tax income of $63.2 million. For the full year, Four Star expects to deliver 19,500 to 20,000 lots and generate $1.7 billion of revenues with a pre-tax profit margin of 14 to 14.5%. At March 31st, Four Star's owned and controlled lot position increased 14% from a year ago to 96,500 lots. 57% of Four Star's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $390 million of our finished lots purchased in the second quarter were from Four Star. Four Star is separately capitalized from D.R. Horton and had approximately $580 million of liquidity at quarter end. With a net debt-to-capital ratio of 29.9%, Four Star's strong capitalization, lot supply, and relationship with D.R. Horton positions them to continue their profitable growth. Bill?
spk04: Financial services pre-tax income in the second quarter was $92.8 million, with a pre-tax profit margin of 41.8%. compared to $107.7 million and 47.8% in the prior year quarter. For the quarter, 99% of our mortgage company's loan originations related to homes closed by our home building operations, and our mortgage company handled the financing for 68% of our homebuyers. FHA and VA loans accounted for 41% of the mortgage company's volume. Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 724% and an average loan-to-value ratio of 88%. First-time homebuyers represented 55% of the closings handled by the mortgage company this quarter. Mike?
spk07: Our rental operations generated pre-tax income of $103 million on revenues of $223 million in the second quarter. During the quarter, we sold one multifamily rental property consisting of 126 units for $50 million. and we sold three single family rental properties totaling 368 homes for $173 million. Our rental property inventory at March 31st was $1.5 billion compared to $544 million a year ago. Rental property inventory at March 31st included approximately $600 million of multifamily rental properties and $900 million of single family rental properties. As a reminder, our multifamily and single-family rental sales and inventories are reported in our rental segment and are not included in our home building segments, homes closed, revenues, or inventories. During the quarter, our rental operations subsidiary, DRH Rental, entered into a four-year, $750 million senior unsecured revolving credit facility. Availability under the rental revolving credit facility is subject to a borrowing-based calculation based on unrestricted cash and the book value of DRH rental real estate assets. There were no borrowings outstanding on the rental credit facility at quarter end. We now expect our rental operations to generate more than $800 million in revenues during fiscal 2022. Our third quarter rental sales will be lower than the second quarter, and fourth quarter sales will be the highest of the year. We also now expect our total rental platform inventories to grow by more than $1.5 billion in fiscal 2022 based on current projects and development and a significant pipeline of our future projects. We are positioning our rental operations to be a significant contributor to our revenues, profits, and returns in future years. Bill?
spk04: Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. At March 31st, we had $3.2 billion of home building liquidity consisting of $1.2 billion of unrestricted home building cash, and $2 billion of available capacity on our home building revolving credit facility. Our home building leverage was 16.4% at the end of March, and home building leverage net of cash was 11.2%. Our consolidated leverage at March 31st was 24.9%, and consolidated leverage net of cash was 18.9%. At March 31st, our stockholders' equity was $16.8 billion, and book value per share was $47.66. up 33% from a year ago. For the trailing 12 months ended March, our return on equity was 34% compared to 27.1% a year ago. During the first six months of the year, our cash used in home building operations was $416 million, which reflects our increased homes and inventory to meet demand and the impact of extended construction cycle times. During the quarter, we paid cash dividends of $79.1 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3.1 million shares of common stock for $266 million during the quarter for a total of 5.8 million shares repurchased fiscal year to date for $544.2 million, an increase of 30% compared to the same period a year ago. Subsequent to quarter end, our board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorizations. The new authorization has no expiration date. We now expect to reduce our outstanding share count by 3% during fiscal 2022. We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year. Jessica?
spk14: As we look forward to the third quarter of fiscal 2022, we expect market conditions to continue to reflect strong demand from homebuyers with continuing supply chain challenges. We expect to generate consolidated revenues in our June quarter of $8.6 to $9 billion, and homes closed by our home building operations to be in a range between 21,500 and 22,500 homes. We expect our home sales gross margin in the third quarter to be in the range of 29 to 29.5%, and home building SG&A has a percentage of revenues in the third quarter to be around 6.6%. We anticipate a financial services free tax profit margin of approximately 40%, and we expect our income tax rate to be roughly 24% in the third quarter. For the full fiscal year, we expect to generate consolidated revenues of $35.3 to $36.1 billion and homes closed by our home building operations to be in a range of 88,000 to 90,000 homes. We forecast an income tax rate for fiscal 2022 of roughly 24%, and we now expect that our share repurchases will reduce our outstanding share count by approximately 3% at the end of fiscal 2022 compared to the end of fiscal 2021. We still expect to generate positive cash flow from our home building operations this year, We will continue to balance our cash flow utilization priorities among our core home building operations, increasing our rental inventories, maintaining conservative home building leverage and strong liquidity, paying an increased dividend, and consistently repurchasing shares. David?
spk18: In closing, our results and position reflect our experienced teams and production capabilities. Industry-leading market share, broad geographic footprint, and diverse product offerings across our multiple brands. Our strong balance sheet liquidity and low leverage provide us with significant financial flexibility to continue aggregating market share and effectively operating in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases, on a consistent basis. Thank you to the entire DR Horton team for your focus and hard work. We are incredibly well positioned to continue growing and improving our operations during the remainder of 2022 and in future years. This concludes our prepared remarks. We will now host questions.
spk01: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We would like to remind participants to please limit themselves to one question and one follow-up each. We also ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Carl Reichart with BTIG. Carl, your line is live.
spk16: Thanks very much. Good morning, everybody. I think at the end of, or in January, we talked about orders being flat, maybe up slightly in the quarter. They were down 10. Can you talk a little bit about the progression of orders over the course of the quarter and when, I'm assuming, you recognize that the production side was not catching up and, in fact, was deteriorating and you decided to slow order pace? Or is there a demand component to this as well?
spk07: Carl, I think it was all our decision to slow sales orders based on production capacity. I think we saw and continue to see very good demand and more buyers, qualified buyers out there for our homes today when we release them for sale. But we did see during the quarter that our cycle times continued to extend, and we made the decision in several of our geographies to delay the release of homes until we could give a better delivery date to those customers and provide a better experience for them in the backlog process. So we saw very strong demand in the quarter, but we did see the cycle times elongate. I think we added two weeks this quarter, unfortunately, and we wanted to make sure we did not create more buyers in backlog with an unhappy experience.
spk16: Great. Thanks, Mike. And then you didn't discuss the diddler water transaction, and I would just like you to give sort of an overview of the strategic rationale for that deal and whether or not this is a function of the assets related to water rights or if this is a business that you think potentially could grow. Thanks very much.
spk14: Sure, Carl. We put out pretty much what we're going to say about Vidler in the press release in terms of them owning a portfolio of premium water rights and other water-related assets across several of our Southwest markets that generally lack adequate supply. We mentioned the total value of the transaction is approximately $290 million, and we do expect it to close in the next month or two. But considering it's subject to the successful completion of a tender offer, we don't have much more to say at this time. and I'll look forward to talking about that in coming quarters after it closes.
spk16: Well, I try. Thanks, Jess. Thanks, everybody.
spk01: Your next question is coming from John Lovallo with UBS. John, your line is live.
spk19: Good morning, guys, and thank you for taking my questions. The first one is, you know, activity at some point will likely moderate, you know, given higher rates and higher prices, and The question I have, and I think the concern that some investors have, is that if and when activity does moderate, how does this sort of change, if at all, your thoughts on capital allocation? I mean, will you sort of back off on, you know, take the foot off the pedal on buying land and maybe switch more towards share buybacks, things of that nature?
spk04: Thanks, John. You know, we're always focused on aggregating market share, and we're positioning ourselves to continue to do that through any economic cycle. Certainly, at some point, impact of rates and impact of affordability will have some impact on demand, and we certainly will adjust our capital allocation, you know, at that time. But we believe we're in a strong position to continue to grow. But certainly, you know, those impacts on demand would impact our investment decisions in land at that point in time.
spk19: Okay, that's good to hear. And then on the option percentage getting up to 77%, I mean, that's much higher than I think anyone thought it when the four-star acquisition occurred and even going back a few years ago. I mean, could this get much closer to call it 90%? And that's just a random number, but just 90% plus, getting closer to what NBR does and know how does this impact the strategy with four star you know as it's grown and you know become spread across a lot of your of your communities i mean you do have the option to bring that ownership position down pretty significantly and still maintain the favorable contract term so just curious how you're thinking about four star longer term from the from the overall option lot percentage we have been focused on it we're going to continue to focus on it you know there is
spk18: Obviously, it's going to be capped at 100%, but our goal is just to continue to get better and more efficient. As to four-star, very happy with four-star. At some point, yes, it will deconsolidate, but there's still a lot of markets that we think we can help scale four-star into. If you look at just the The earnings we're making, our shareholders are making all four stars. It's a very good investment and kind of not a bad place to be. But, yes, at some point it will deconsolidate. But it's more geared toward their platform build-out than it is our desire to liquidate some percentage of our shares.
spk19: Thanks, guys.
spk01: Your next question for today is coming from Stephen Kim with Evercore ISI. Stephen, your line is live.
spk09: Yeah, thanks very much, guys. Congratulations on the strong results. Obviously, with the big rise in rates, everyone's concerned that things are going to slow. I think John mentioned that, that that's people's expectations. I guess two questions with respect to the rise in rates. One is... Is there anything that you are planning in terms of the communities which would likely come online in the next year or two, let's say the next year, new communities opening, where you're making adjustments to your planned home sizes, amenity levels, or anything like that, and would that have an impact on the gross margin? And then secondly, can you just sort of talk about Why do you think we have not seen in your communities, despite obviously affordability being more stretched, why do you think we haven't seen it yet in terms of your conversations with customers? Can you talk about the role of rate locks or just anything that would be helpful for understanding why we maybe haven't seen anything yet?
spk08: Steven, I think to your first question in terms of community design, plan design, I think we are going to continue to focus at the affordable range and work towards those buyers. I don't see a significant change in how we build, what we build, but if it continues to be a push on affordability, then we'll put the appropriate homes in place. It may mean some smaller homes, but not a significant shift from where we are today. In terms of in our communities and in our sales offices, certainly there's concern from the buying public over rates, but selling later in the process like we do, we don't have as much exposure as we could if we were selling far out to the shifts in rate conditions. And that's why we've continued to restrict our sales to a later timeframe so that we're putting people in backlog at closer to the rate that they're gonna close at.
spk09: That makes a lot of sense. In this quarter, can you give us a sense for how many of your closings were done with a rate lock, the closings I'm referring to, not the orders?
spk14: Yeah, so I looked at it actually on a forward-looking basis, and we have essentially our next month, so April, 100% locked, and then as you would expect, that percentage ticks down, but it's the majority of the quarters closings that are locked, and you've got to get to four-plus months out before that's a more de minimis percentage.
spk09: Okay, great. Thanks very much, guys.
spk01: Your next question for today is coming from Ivy Zellman with Zellman and Associates. Ivy, your line is live.
spk13: Thank you. Good morning and congrats on the strong results. Maybe you guys can just give us some perspective on the rental business with both the merchant-built single-family rental communities as well as your multifamily projects. Can you talk about how many of them, when you're developing them, are already pre-sold? And have you seen any changes in valuation as it relates to selling with the surge in rates as we hear chatter that values, at least within multifamily, have really started to be pressured. And just the overall buying appetite that's out there with so much capital still appears to be chasing this asset class.
spk07: Thank you, Ivy. We do see a lot of very strong demand and strong execution on the pricing. We do not sell any of our communities at this point During the development phase, we're selling them in the lease-up phase at stabilization. So we're seeing still very good demand and very good pricing execution on those transactions that we have closed on. So current outlook, you would expect cap rates could be affected by rising interest rates, but we're also seeing very strong leasing demand and very strong rental growths, which certainly affect cap rate outlooks.
spk14: And at a 40 to 50 plus percent margin on these sales, if the market were to soften a bit, we still expect to generate very strong profits and returns.
spk13: Great. And then just secondly, with respect to the delays that you've seen and, you know, obviously the industry's impacted, can you walk us through on the development side with municipalities, like specifically where those components of the overall impact is? related to, like, the difference versus sourcing materials? Because, you know, some materials are not a problem anymore, so everyone talks about, you know, it's a whack-a-mole, but what's it like on the development side as well as on the municipality side, and how much of that is impacting the two-month, year-over-year increase in cycle time?
spk08: Well, I think you've got, you know, certainly municipality challenges through the entitlement process, you know, in terms of bringing new lots to the market, and we still haven't seen you know, full return of municipalities when you're talking about, you know, permitting and or inspection process. So it certainly is impacting some of that, you know, as we work through the supply chain challenges and then you finally move homes on to the next stage. You know, it is, we do see some delays in inspections and some of the municipality services that we receive. So it's certainly been part of the impact to our cycle time extension.
spk13: And let me just sneak in one last one, if I could, just with respect to the inflation that we've seen. Can you be more specific on recognizing, you know, your land is predominantly controlled via option? Like, what has changed on the pricing to tying up and controlling land? And how much overall or lot of inflation that you are buying outright are you seeing relative to a year ago? And maybe I have to be just general because it's obviously different by market.
spk18: I'd say the overall land market has tracked the sales price of homes. So it is good to be in a position where we control 550,000 watts at prices contracted two years ago, three years ago, four years ago, and not be in a position today where we have to go buy something. So we are looking at that. We're monitoring it. I believe liquidity is going to drive market share gains and the ability to not be at risk of credit markets and or banks is a huge competitive advantage for us. And we're going to protect that. We're going to be conservative in our land searches. I mean, there are good deals out there that we put under contract this year. that we will take to close. But we are not in a position where we have to go buy anything. And we're going to, I think, see a significant benefit of that as we proceed through this market.
spk13: Thank you. Good luck.
spk18: Thank you.
spk01: Your next question for today is coming from Matthew Boulay with Barclays. Matthew, your line is live.
spk10: Morning, everyone. Thank you for taking the questions. Just another question on what you do from a sort of medium term perspective from what you can control. You know, in a scenario where housing activity were to slow, as we're talking about this morning, you know, what does DR Horton do from a supply perspective? To what degree does sort of your own plans for community replenishment or starts kind of flex with, you know, these changes in interest rates and demand? You know, just thinking, again, kind of medium-term sort of annual volume growth. How should we think about how you all are viewing that? Thank you.
spk07: Matt, we're very much a bottom-up community-level driven company, and we're going to evaluate demand we see at each individual community and sub-market and look for home starts to match that demand that our local operators are seeing. And that couples with community replacement needs in those submarkets based upon demand we see in real time in the field. So in the near term, we'll continue to adjust starts. In the more medium term, we'll look at subdivision openings and phase sizing. And then as well as, you know, Paul touched on before, we may be adjusting some product to some smaller sizes if that's appropriate for the given market.
spk10: Gotcha. Okay, that's very helpful. And then secondly, just... Zooming in back to the very near term, I think you've seen maybe in some of the housing data, maybe a little bit in our own survey work, it seems like some trends in the housing market might have become a little more choppy in recent weeks, perhaps not surprising given the movement interest rates. But just anything you're seeing kind of on the leading edge, on the margin, whether that's any sort of pockets of changes in demand or, again, incentives appearing and you know, various markets. Just anything you're kind of seeing, you know, later into March and into April. Thank you.
spk18: You know, the rate increase is eliminating some people from the homebuying experience. But we still have more people, qualified buyers, trying to buy homes. than we can produce today. You know, one of the things that really, I think, has impressed me back in 2018 when you saw a rapid rise in rates, demand just was significantly reduced. And then, you know, after the rate shock, after the rate shock was kind of mitigated, we saw demand come back and come back strong. But through this cycle, which is in even more rapid rate increases, yes, we've had people that don't qualify anymore, but the demand side is still very strong. So just the desire to own homes, and it may be the, the fact that prices have escalated very fast and rents are escalating even faster than the price of new homes. And all the talk about inflation and then locking in your housing costs for 20 years. I mean, it is, home ownership is a cherished thing today. And the people coming out of, the millennials coming out or even individuals relocating from other markets, to kind of where the growth is taking place. They want to own a home. They want to lock in their housing costs, and they want to get into neighborhoods that they can raise families in.
spk10: Well, thank you for that, David, and thanks, everyone. Good luck.
spk01: Thank you. Your next question is coming from Anthony Pitaneri with Citigroup. Anthony, your line is live.
spk11: Good morning. You know, cancellation rates, I guess, kicked up 100 bps, maybe from record low levels. Would you characterize that as more kind of noise or maybe more clearly, you know, customers no longer able to secure mortgages? You know, would you expect cancellations maybe to climb again in 3Q if rates stay at their current level? And, you know, I think in the past you've provided kind of a sensitivity analysis around sort of mid-single digit, high single digit, a backlog that potentially could be at risk, you know, with the 100-bit rise in rates. Any sort of, you know, thoughts on how that has shaken out now that we're above 5% now on rates?
spk14: Sure, Anthony. I mean, we look at a 1% change in our cancellation rate is essentially flat. It's still abnormally low. historically low. We typically run in the high teens to low 20s, and that's a can rate we're very comfortable running at. The main reason continues to be that buyers can't ultimately qualify for the home purchase. So that 15%, 16%, 17%, wherever it falls out each quarter, really no concerns from us on that end. In terms of the rate sensitivity analysis, we did run the same sensitivity as we've talked to each of the last few quarters. I think rates have already kind of run up to where that was run at a couple of weeks ago as we prepped for this call, but it had only ticked up, you know, to call it roughly 10% of buyers and backlog today would be at risk. As I mentioned earlier in answer to another question, you know, all of April is already rate locked if they're going through a mortgage company, so that piece wouldn't be at risk. And then we also would work to move people from a different loan product or see if they could document additional income. And then to kind of second some things that the guys have already said today, for those buyers that do unfortunately fall out because they can't qualify, there's no shortage of buyers behind them to take their place.
spk11: Okay, that's very helpful. And then just with higher rates, are you making any strategic shifts to target a different mix of buyers? Are you seeing buyers that you wouldn't normally talk to kind of moving down market to more affordable offerings? And, you know, understanding, you know, your entire offering is fairly affordable, like, which of your buyer types do you think is best positioned to maybe weather rising rates as it move up or any thoughts there?
spk08: You know, we really haven't made any significant shift and don't see a need to as rates rise. You know, it's going to be more of that shock to payment for folks when they have to reset maybe the size home or price that they can then qualify for. So, you know, we're going to catch those people that have been buying up that may fall down the price curve and or size of home and still be able to pick them up in the majority of our communities. So no real... shift in what we're doing with any of our buyer demographics. We're still seeing strong demand, as everyone's mentioned, across the spectrum.
spk17: Okay, that's helpful. I'll turn it over.
spk01: Your next question is coming from Mike Rehat with JP Morgan. Mike, your line is live.
spk02: Hi, thanks. Good morning, everyone, and thanks for taking my questions. Um, you know, I just wanted to, to, to revisit the, you know, the, the can rate, which I think, you know, as you mentioned, Jessica, it's essentially flat, um, and, and, and extremely low, you know, we've kind of thought of it as a key metric. To understand, you know, the potential impact of, of, of, of the rate move over the last 60, 90 days. And I was curious if you've seen any change throughout the quarter. obviously it was up 100 basis points versus a year ago, and I think 100 basis points, I believe, sequentially. But anything, you know, throughout the quarter that maybe perhaps you ended the quarter at a higher number than at the beginning, and, you know, if there's been any change in April, curious around that.
spk14: It really was relatively flat throughout the quarter, give or take a 1% change. So sequentially, you know, we were, I guess we were both a year ago and in the last quarter we were at 15%. This quarter we were at 16% and it was right around that range for the duration of the quarter.
spk02: Okay. Also, you know, throughout the quarter, you know, you kind of said that demands remain strong, more demand than supply. I would presume then that, you know, as a result, your pricing power and the incentives that you've had in the marketplace really haven't changed at all. Obviously, your gross margins continue to improve and you expect further margin improvement in the third quarter. Just wanted to make sure that was the case as well. And, you know, if that was the case for yourselves, as well as if you witnessed any changes in the broader marketplace.
spk04: Mike, we have seen consistent ability to raise prices through the quarter, seen consistent increases in our sales order pricing that then flow through our backlog and through our closing pricing. That's what gives us the confidence to say that our margins are going to be slightly better the next quarter because we can see those sales prices coming through in our closings in the next quarter. So to date, we have not seen a change in our ability to raise prices. I think naturally as we look a little bit longer term with the impact of rates and impact of overall price increases, at some point we would expect that to moderate. But at this point, we have not seen any signs of that as of yet.
spk02: One last quick one, if I could. Just the 3% reduction of year-end share count versus 2% previously. Sorry if I missed this earlier. I just want to make sure, is that a function of a greater amount of dollars dedicated to share repurchase or in part driven by the recent reduction in share price in the market over the last couple months?
spk04: A little bit of both. Mike, as we look at our capital allocation for the year, our expectations for how much we would utilize, how many dollars we would utilize in share repurchase has gone up versus our prior estimates. But then certainly the current valuation of our stock does allow us to buy more shares per dollar as well. And so it's a little bit of both and that's allowed us to increase our estimate from a 2% reduction to a 3% reduction.
spk02: Great. Thanks so much, guys. Appreciate it.
spk01: Your next question for today is coming from Truman Patterson with Wolf Research. Truman, your line is live.
spk06: Hey, good morning, everyone. Thanks for taking my questions. I just wanted to follow up on one of John's questions previously. I realize that cycle times have been extended. You have 60,000 homes under construction, which ties up networking capital, but we're now halfway through the year. I'm just hoping you can give an update or possibly a number around your 2022 operating cash flow expectation. And then, you know, just on the capital allocation decision based on, you know, rates increasing, it seems like you're going to be a bit more or you're going to continue with program added share repurchase. But How do you balance this with potentially, you know, even increasing liquidity, given all the commentary from the Fed and possibly having a, you know, a rainy day fund, if you will?
spk04: It is a constant balance, Truman. We're not giving specific dollar guidance regarding our operating cash flow other than we do expect to generate positive cash flow from our home building operations. On a consolidated basis, our operating cash flow also includes the investments we're making in our rental platform. obviously are significant, increasing those by a billion and a half this year. And then certainly one factor today that is tying up some of our capital is the extension of our bill times, being longer than two months, longer than a year ago, certainly does tie up a significant amount of capital. But certainly we are working towards stabilizing that and improving those cycle times, which We would expect to start to bring that cash back some towards the end of fiscal 22 and then certainly into fiscal 23. So it is a balance. And as we plan our capital allocation, we plan our liquidity targets. We are just seeking to make sure we stay in as strong and flexible position as possible to handle what we see in the market today and position ourselves for further growth, aggregation of market share and generating returns for shareholders.
spk06: Okay, thanks for that. And then one final one on just current market conditions. Just are you seeing any metros that are maybe a little bit slower than the others? And then for the buyers purchasing today, I realize this might be somewhat of an unfair question, but how long have they been in the market? Were they really searching before rates started to move? Or are we seeing incremental buyers continuing to come in after the higher rate environment that are more recently entered, if you will?
spk07: Truman, I think on the markets, we see markets have varying levels of performance and demand, but they're all very strong relative to where they've been. Certainly the migration patterns within the country and the areas that are gaining population have incredibly strong demand. But markets across our footprint, we still see more buyer demand than we have production capacity for today. And so we're still very encouraged by that. Some of those buyers have been in the marketplace for quite a while. Others are more recent entries, but we don't have any hard data we could share with you on how exactly long they've been conducting their search.
spk06: Okay, thank you, and good luck in the upcoming year. Thanks.
spk01: Your next question for today is coming from Deepa Raghavan with Wells Fargo. Deepa, your line is live.
spk15: Thanks everyone for taking my question. Good morning. Of the supply chain incremental headwinds, is there a way to think about how much we're omicron related? I'm assuming that should be probably behind us now. and how much is kind of carried forward. I think where I'm going with it is, are you baking in any sequential improvement off of that two weeks elongated cycle time, assuming there must have been some relief from Omicron?
spk14: Yeah, I think we would agree with you on the Omicron front. I mean, there's certainly still labor challenges in labor and manufacturing facilities, distribution centers. It's still harder to come by, but it does seem to be slightly improving. drivers continue to be a really big area of need to be able to get products to job sites. In terms of if we're baking in any incremental improvement in our build times, I think I would tell you for us to achieve the high end of our guidance range, and certainly to do any more of that, we would need to see improvement in our build times from what we've seen today. but we do feel like we're maybe in the early stages of that to where we felt comfortable still, although we lowered our closings guide, we did leave 90 in the range of closing 88 to 90 because we have the houses. It's just a matter of getting them completed and across the finish line with the buyer.
spk15: Got it. Staying on the topic of the guide, I don't think you guided for the full year gross margins unless I missed it. But it does definitely look like you have some good tailwinds that can extend into Q4 and give you some good gross margin visibility. Do you want to provide any color on that for Q4?
spk04: We do only guide one quarter out on gross margin, but I would agree with you that currently we do have some tailwinds with the average prices that have been in our backlog and in our recent sales orders. that some of which will be homes that would close into Q4. I think we do have some tailwinds. But as we've said many times, our true visibility to margin really doesn't go far beyond a quarter. So we only guide specifically to Q3. But we do feel like we're still going to see very good gross margins through Q4 as well.
spk15: That's very helpful, Culler. Thanks very much and good luck.
spk01: Your next question for today is coming from Susan McLary with Goldman Sachs. Susan, your line is live. Thank you.
spk12: Good morning. My first question is on the SG&A. Obviously, the gross margin has been impressive, but so has your SG&A performance this year. You continue to come in well below where we are modeled and where you've guided to. Can you talk to the potential to continue to see that coming down now that we're solidly in that 6% range and maybe where we can get to over time there?
spk04: Thank you, Sue. You know, obviously an important part of our culture and our business model, we are very focused on ensuring that we stay very efficient with our overhead while still making sure we're building our overhead and our infrastructure to support the growth. But with the price appreciation that we've seen alongside that, that has certainly aided in dropping the SG&A percentage as a percentage of revenue a bit faster than, honestly, than we would have modeled as well. And so we've been very pleased with that. Certainly want to make sure we continue to position ourselves adequately there. But with the prices that we have seen and that we see coming over the next quarter or so, we do expect to still see very good SG&A leverage with the guidance that we're providing For Q3, that assumes another 50 basis point year-over-year improvement in SG&A. So, yes, we do see ourselves with an SG&A rate getting down into the sixes and for at least the near term staying there.
spk12: Okay. All right. Thank you. And then my second question is a bit longer term. You know, David made the comment earlier around consumer confidence and, you know, overall the sort of desirability around homeownership today and how that perhaps is very different relative to where we were certainly coming out of the last cycle. Can you talk to what sustains that level of confidence in homeownership and what that perhaps could mean even as rates do rise in terms of keeping that demand pool there and people's willingness to sort of continue to extend and really try and make that effort to get into the home?
spk18: You know, I've been doing this for a long time, and the desire to own a home is I think, kind of an American part of the American culture. It gives you a sense of safety and a nest to build your family in. So I think the downturn in 08, 09, 10 where home values were just decimated, that put a big pause on the desire to own homes. I think as this cycle continues, and I think it's gonna continue to elongate, the housing formation, the desire to get close to neighborhood schools, all those things have kind of returned home ownership to kind of the American dream again. So, it's, getting in a home today is hard, It's not nearly as hard as it was when I bought my first home. It feels like it's almost a cultural shift or a return to family, community, and I think the demand is significantly higher than the homes that can be produced.
spk12: Okay. Well, thank you for those thoughts and good luck with everything.
spk00: Thank you.
spk01: Your next question for today is coming from Jay McKenless with Web Bush. Jay, your line is live.
spk05: Thanks for taking my questions. I just wanted to clarify, I think you've discussed this already, but the reduction in the closing guidance for the full year, that's not a shift to homes into the rental operation. That's just you guys slowing down orders in the field to keep up with production?
spk14: It's when our homes are going to be completed and the ability to close those in what quarter. Yeah, there's no transition to build for rent in those numbers. We've kept our home building for sale completely separate from what we're reporting on a rental basis.
spk07: We have a plan for both businesses, one for the for sale side of the business and one for the rent side of the business. And the change in the guidance has nothing to do with transitioning communities from one to another. It's solely dealing with completion of homes, putting the buyer into a completed, good-looking house when that house is ready.
spk05: Got it. Okay. Thank you for clarifying that. And then my second question, I think David earlier was talking about liquidity being the competitive advantage, especially with land prices moving up. When When does this lack of liquidity, I think, especially for some of the smaller private builders, when does that really force a bigger wave of M&A than what we've seen so far post-COVID?
spk18: You know, I don't know that it's going to force a larger M&A program. I do think that their inability to secure financing to move forward on different projects or even to start houses is going to open up market opportunity for us, both in our ability to aggregate market share on the home sales side and the ability to control longer and longer land positions at very favorable numbers. So it's, you know, when you look at the impact of a two-plus-month expansion of our cycle time and what that's done to our liquidity, and then understand that we are still building houses much faster than anybody else, and we started and are going to continue to protect a very strong liquidity position. I got to believe there's tremendous pressure especially the private builders. And at some point, you know, these guys have made a lot of money over their careers, and they're guaranteeing loans. And at some point, you're just not going to put everything at risk. So I do think that's going to open up market share gains for us. And we are very well positioned to take that market when it does open.
spk05: That's great. And if I could sneak one more in, Bill was encouraged to hear the community count was up year-on-year and sequentially. How are you guys feeling about that for the full year, just on a percentage change basis?
spk04: We're still looking at the low single-digit increase, but it has been good to see more communities get opened, starting to basically replenish our communities from when we ran them down a bit early a year and 18 months ago. still see a solid incremental increase in communities.
spk14: And organic growth in our core markets is still going to be the biggest driver, but we did add a few more new markets to our market count this quarter. We're now in 104 markets and have, you know, another list of markets behind that that we're planning to expand into as well.
spk05: Okay, that's great. Thanks for taking my questions.
spk01: Your next question for today is coming from Dan Oppenheim with Credit Suisse. Dan, your line is live.
spk03: Thanks very much. Just a quick question. Given the success that you've had in terms of express homes taking share generally, what you're seeing in terms of buyers coming in from competition now and so just potentially market share for express in this environment and how you're seeing that playing out? Sorry, in terms of the gains for Express in terms of market share, given the efficiency and the affordability there, how you're seeing that in terms of what's happening to the consumer right now?
spk18: You know, I think the ability to produce Great value at the lower end is a tremendous advantage that we have. The buyer pool, significantly deeper there. Qualification may be a little tougher, but as kind of referenced before, people really want to buy a home, especially their first home. I see that segment of our business just continuing to get stronger. Whereas somebody may have pushed up in price at a very low rate, which we had a lot of first-time homebuyers buying in the Horton brand, ultimately it comes down to payment. If their desire is to own a home in a very, very nice community location, our competitive advantage just gets better and better.
spk17: Great, thank you.
spk01: Ladies and gentlemen, that's all the time we have for questions. I would now like to turn the floor back over to David for closing remarks.
spk18: Thank you, Holly. We appreciate everybody's time on the call today and look forward to speaking with you again to share our third quarter results in July. And to the D.R. Horton family, Don Horton and the entire executive team thank you and congratulate you on delivering an outstanding second quarter. We are incredibly well positioned today. You once again have proven you are the best of the best in this industry. Thank you.
spk01: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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