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Operator
Good morning and welcome to the fourth quarter 2022 earnings conference call for D.R. 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 we will open the floor for your questions and comments after the presentation. If you would like to join the queue at any time, you may press star 1 on your telephone keypad to enter the queue. Should you wish to remove yourself from the queue, you may press star two. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Jessica, the floor is yours.
Jessica Hansen
Thank you, Tom, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2022 financial results. Before we get started, today's call includes 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 factors 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 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 10-K towards the end of next week. After this call, we will post updated investor and supplementary 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.
Tom
Thank you, Jessica, and good morning. We are also 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 finished the year with a solid fourth quarter, which included a 20% increase in consolidated pre-tax income to $2.1 billion and a 19% increase in revenues to $9.6 billion. Our pre-tax profit margin for the quarter improved 10 basis points to 21.4%, and our earnings for diluted share increased 26% to $4.67. For the year, consolidated pre-tax income increased 42% to $7.6 billion on $33.5 billion of revenue, which increased 21%. Our pre-tax profit margin for the year improved 350 basis points, 22.8%, and our earnings per diluted chair increased 45% to $16.51. We closed a record 83,518 homes this year in our home building and single-family rental operations, and our home building SG&A as a percentage of revenues of 6.8% was an all-time low. Our home building return on inventory for the year was 42.8%, and our consolidated return on equity was 34.5%. Our strong financial performance during a year of significant challenges and volatility reflects the strength of our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. Our home building cash flow from operations for 2022 was $1.9 billion. Over the past five years, we have generated $7.5 billion of cash flow from home building operations, while growing our consolidated revenues by 138% and our earnings per share by 503%. During this time, we also more than doubled our book value per share, consistently kept our home building leverage under 20%, and increased our home building liquidity by $1.8 billion, all while significantly increasing our returns on inventory and effort. During most of the year, demand for our homes was strong. In June, we began to see a moderation in housing demand that has continued and accelerated through today. The rapid rise in mortgage rates coupled with high inflation and general economic uncertainty have made many buyers pause in their home buying decision or choose to not move forward with their home purchase. The supply of both new and resale homes at affordable price points remains limited, and the demographics supporting housing demand remain favorable. The uncertainty of this market transition may persist for some time and could get more challenging if mortgage rates continue increasing. However, we are well positioned to meet changing market conditions with our experienced teams, affordable product offerings, flexible lot supply, and great trade and supplier relationships. Our strong balance sheet, liquidity, and low leverage provide us financial flexibility. We will continue to focus on turning our inventory and managing our product offerings, incentives, home pricing, sales pace, and inventory levels to meet the market, optimize returns, increase market share, and generate increased cash flow from our home building operations. Mike?
Mike Murray
Diluted earnings per share for the fourth quarter of fiscal 2022 increased 26% to $4.67 per share, and for the year, earnings per share increased 45% to $16.51. Net income for the quarter increased 22% to $1.6 billion, and for the year, net income increased 40% to $5.9 billion. Our fourth quarter home sales revenues increased 23% to $9.4 billion, on 23,212 homes closed, up from $7.6 billion on 21,937 homes closed in the prior year. Our average closing price for the quarter was $403,700, up 17% from last year and up 3% sequentially. We closed fewer homes than we expected during the fourth quarter due to a slower sales pace, increased cancellations, and continued construction delays. In addition, we estimate that approximately 730 home closings in Florida and South Carolina were delayed from September due to Hurricane Ian. Paul?
spk06
During the quarter, we continued to sell homes later in the construction cycle to better ensure the certainty of the home close date and mortgage rate for our homebuyers, with almost no sales occurring prior to start of home construction. Our net sales orders in the fourth quarter decreased 15% to 13,582 homes. and our net sales order value was down 10% from the prior year to $5.4 billion. Our cancellation rate during the fourth quarter was 32% compared to 19% in the prior year quarter and 24% in the third quarter. Our average number of active selling communities increased 8% from the prior year and was flat sequentially. The average sales price on net sales orders in the fourth quarter was $399,600 up 6% from the prior year, but down 4% sequentially from the June quarter. In October, as mortgage rates continued to increase, our net sales orders were below prior year levels, and our cancellation rate remained elevated. As a result, we currently expect our first quarter net sales orders to be down approximately 25% to 35% year over year. Bill?
Mike
Our gross profit margin on home sales revenue in the fourth quarter was 28.3%, up 140 basis points from the prior year quarter, but down 180 basis points sequentially from the June quarter. On a per square foot basis, our revenues were up 4% sequentially, while our stick and brick costs per square foot increased 8% and our lot cost increased 3%. The decrease in our gross margin from the third to fourth quarter reflects the increase in our stick and brick costs and increased incentives provided to home buyers to ensure the closings of our homes and backlog during the rapid rise in mortgage interest rates. We are offering mortgage interest rate locks and buy-downs and other sales incentives to address affordability concerns and to drive sales traffic to our communities. As we adjust to market conditions and focus on turning our inventory to maximize returns, our incentive levels have continued to increase and we are adjusting base home prices where necessary. We expect our average sales price and home sales gross margin to decrease from current levels in fiscal 2023. As a result, we are working with our trade partners and suppliers to reduce our construction costs on new home starts and are pleased with our early progress. Jessica?
Jessica Hansen
In the fourth quarter, home building SG&A expenses a percentage of revenues with 6.7% down 20 basis points from 6.9% in the prior year quarter. For the year, home building SG&A expense was 6.8%, down 50 basis points from 7.3% in 2021. Our annual home building SG&A expense as a percentage of revenues is at its lowest point in our history, and we will continue to control our SG&A while ensuring that our platform adequately supports our business. In fiscal 2023, our home building SG&A as a percentage of revenues will likely increase from current levels.
Tom
Paul?
spk06
We started fewer homes this quarter as we worked to position our inventory with an appropriate number of homes relative to market conditions. We started 13,100 homes during the quarter in our home building operations as we began negotiations to lower our construction costs on future new home starts. We ended the year with 46,400 homes in inventory, down 3% from a year ago and down 18% sequentially. 27,200 of our total homes at September 30th were unsold, of which 4,400 were completed. For homes we closed this quarter, our construction cycle time increased by a week compared to the third quarter, which reflects continued lingering supply chain issues. However, we are beginning to see some stabilization in cycle times on homes we have recently started, and we expect our cycle time to improve in fiscal 2023. and inventory to meet the level of demand in the market. Mike?
Mike Murray
At September 30th, our home building lot position consisted of approximately 573,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. Our total home building lot position decreased by 25,000 lots from June to September. 29% of our total owned lots are finished, and 50% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. We continually underwrite all of our lot and land purchases based on current and expected home prices and costs. We are actively managing our lot and land pipeline and our investments in lots, land, and development to meet our needs during this transition in the housing market. During the quarter, our home building segment wrote off $34 million of option deposits and due diligence costs. related to land and lot option contracts we terminated or expect to terminate in the future. We expect our level of option cost write-offs to remain elevated in fiscal 2023 as we manage our lot portfolio. Our home building segment had no inventory impairments during the quarter or the year. Our fourth quarter home building investments in lots, land, and development totaled $1.5 billion, down 19% from the prior year quarter and down 15% sequentially. Our current quarter investments consisted of $780 million for finished lots, $560 million for land development, and $150 million to acquire land. Paul?
spk06
For the fourth quarter, Four Star, our majority-owned residential lot development company, reported total revenues of $381.4 million on 3,914 lots sold and pre-tax income of $66. delivered 17,691 lots, generating $1.5 billion of revenues with a pre-tax profit margin of 15.5%. At September 30th, Four Star's owned and controlled lot position was 90,100 lots. 59% of Four Star's own lots are under contract with D.R. Horton or subject to a right of first offer. $250 million of D.R. Horton's lot purchases in the fourth quarter were from Four Star. Four Star is separately capitalized from D.R. Horton and had approximately $620 million of liquidity at year end, with a net debt-to-capital ratio of 26.9%. Four Star is well-positioned to meet changing market conditions with its strong capitalization, lot supply, and relationship with D.R.
Mike
Horton. Bill? Financial services pre-tax income in the fourth quarter was $2.4 million on $134 million of revenue, with a pre-tax profit margin of 1.8%. As expected, our financial services pre-tax profit margin decreased this quarter, primarily due to a significant pull forward of revenue from rate lock commitments in the third quarter, as we discussed on last quarter's call. Also during the fourth quarter, there were increased competitive pressures in the mortgage market and increased costs of rate locks provided to customers due to rising rates. For the year, financial services pre-tax income was $291 million on $795 million of revenue, representing a 36.6% pre-tax profit margin. We expect our financial services pre-tax profit margin for fiscal 2023 to be higher than the fourth quarter, but below the full year of fiscal 2022. During the fourth 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 73% of our homebuyers. FHA and VA loans accounted for 42% 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 87%. First-time homebuyers represented 57% of the closings handled by our mortgage company this quarter. Mike?
Mike Murray
During fiscal 2022, our rental operations generated $510 million from the sale of 775 multifamily rental units and 774 single-family rental homes, earning pre-tax income of $202 million. In the fourth quarter, our rental operations generated $21 million of revenues from the sale of 96 single-family rental homes and incurred a pre-tax loss of $13 million. which were below our expectations going into the quarter. We had several single-family rental projects in Florida, totaling 562 homes, that were scheduled to close in September but were delayed due to Hurricane Ian. These projects closed in October and will be reflected in our first quarter results. Also, one multifamily project and multiple single-family rental projects that were expected to be sold and closed in the fourth quarter were delayed due to changes in the capital markets that affected the timing of buyers' financing. Our rental property inventory at September 30th was $2.6 billion, which included approximately $900 million of multifamily rental properties and $1.7 billion of single-family rental properties. As a reminder, our multifamily and single-family rental operating results are separately reported in our rental segment and are not included in our home building segments, homes closed, revenues, or inventories. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform matures and expands across more markets. Bill?
Mike
Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. We are committed to maintaining a strong balance sheet with low leverage and significant liquidity to provide a firm foundation for our operating platforms during changes in market conditions and to support our ability to provide consistent returns to our shareholders. During fiscal 2022 our cash provided by home building operations was $1.9 billion and the cumulative cash generated from our home building operations for the past five years was $7.5 billion. At September 30th we had $4 billion of home building liquidity consisting of $2 billion of unrestricted home building cash and $2 billion of available capacity on our home building revolving credit facility. Our liquidity provides significant flexibility to adjust to changing market conditions. Our home building leverage was 13.2% at fiscal year end, and home building leverage net of cash was 4.4%. Our consolidated leverage at September 30th was 23.8%, and consolidated leverage net of cash was 15.4%. We repaid $350 million of senior notes at maturity this quarter, and we have $700 million of senior notes that mature during fiscal 2023. At September 30th, our stockholders' equity was $19.4 billion, and book value per share was $56.39, up 35% from a year ago. For the year, our return on equity was 34.5%, an improvement of 290 basis points from 31.6% a year ago. During the quarter, we paid cash dividends of $78.2 million for a total of $316.5 million of dividends paid during the year. During the quarter, we repurchased 3.6 million shares of common stock for $251.7 million for a total of 14 million shares repurchased during the year for $1.1 billion. As a result, our outstanding share count is down 3% from a year ago. Based on our strong financial position, our board of directors increased our quarterly cash dividend by 11% to 25 cents per share. Jessica?
Jessica Hansen
As we look forward to the first quarter of fiscal 2023, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets, and general economic conditions that may significantly impact our business. As we have already mentioned, we are utilizing more incentives in today's market and are reducing home sales prices where necessary which will impact our average sales prices and gross margins more in the first quarter than the quarter we just completed. We are providing detailed guidance for the first quarter, as is our standard practice, but due to the current uncertainty in the market, our ranges for expectations are wider than normal. We currently expect to generate consolidated revenues in our December quarter of $6 to $6.8 billion, and our homes closed by our home building operations to be in the range of $15,000 to 16,500 homes. We expect our home sales gross margin in the first quarter to be approximately 23 to 24% and home building SG&A as a percentage of revenues in the first quarter to be approximately 8 to 8.4%. We anticipate a financial services pre-tax profit margin of around 20% and we expect our income tax rate to be approximately 23% in the first quarter. Looking further out into fiscal 2023, we have less visibility due to the macro level uncertainties we have mentioned. It is too early to know what housing market conditions will be three to six months from now during the spring selling season, so we are not providing specific guidance for the full year yet. We will reassess each quarter and give more color on our expectations as we can. We are well positioned to aggregate market share in both our home building and rental operations. Our fiscal 2023 home closings volume, pricing, and margins will be determined by future market conditions and our efforts to meet the market and improve our inventory terms, construction cycle times, and costs. Our goal is to generate consolidated revenues in fiscal 2023 that are slightly higher than fiscal 2022. However, the low end of our current range of expectations includes consolidated revenues potentially down from fiscal 2022 by a mid-teens percentage. We forecast an income tax rate for fiscal 2023 of approximately 23%. We expect to generate increased cash flow from our home building operations in fiscal 2023 compared to fiscal 2022. And we plan to consistently repurchase shares to reduce our share count during the year with the amount of our repurchases dependent on cash flow, liquidity, market conditions, and our investment opportunities. We plan to continue to balance our cash flow utilization priorities among our core humbling operations, our rental operations, maintaining conservative humbling leverage and strong liquidity, paying an increased dividend, and consistently repurchasing shares. David?
Tom
In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility to operate effectively in changing economic conditions and continuing to aggregate market share. 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 Dior Horton team for your focus and hard work. Your efforts during 2022 were remarkable. This was a year in which we faced construction and operational challenges we have never faced before, with periods of unsustainably high demand, followed by historic rise in mortgage rates. Despite these challenges and market volatility, we closed the most homes in a year in our company's history, completing our 21st year as the largest home largest builder in the United States with record profits and returns. And we are well positioned to continue improving our operations and providing home ownership opportunities to more American families in 2023. This concludes our prepared remarks. We will now host questions.
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. We do ask today that while asking your questions, you limit yourself to one question and one follow-up. If you would like to enter the queue at this time, you may press star one on your telephone keypad to enter the queue. Should you wish to remove yourself from queue, you may press star two. Once again, as a reminder, ladies and gentlemen, to please limit yourself to one question and one follow-up. Please hold a moment while we poll for questions. And the first question today is coming from Stephen Kim from Evercore ISI. Stephen, your line is live. Please go ahead.
Stephen Kim
Thanks very much, guys, and thanks for all the information. Obviously, pretty solid performance in a tough environment. I wanted to ask you specifically about your starts outlook. Can you give us a sense for how much of an increase in starts we might expect in the December quarter, maybe year over year or quarter over quarter? And maybe alternatively, how many finished specs or total specs per community are you expecting to have as you enter the new calendar year?
spk06
Stephen, looking into the first quarter, you know, we are finishing the year with 46,000 homes in inventory and positioned for our goals as we look forward to the year and looking to maintain a similar balance as we work through the first quarter. So expect that our starts will keep pace with our closings through the first quarter.
Stephen Kim
Gotcha. And Paul, how?
Mike
In terms of the completed specs, Steve, we're in a more normal position now with having some completed specs across more of our communities. That puts us in a good position to sell in the current environment, given that buyers are concerned about what their interest rates are going to be. So if we have homes that are ready to move in too quickly, they can lock their rates with confidence and close on a known schedule.
Stephen Kim
So the level of completed specs you have now is you're comfortable with sort of maintaining that level, right? That's what you're saying?
Raymond James
Yes.
Stephen Kim
Okay. And then the second question relates to your comments about navigating the difficult environment or the uncertain environment by managing your product offerings and negotiating lower costs. It's certainly the negotiation of lower costs. I understand that's going to be ongoing. But the managing of your product offerings, can you give us a sense of for how quickly you're able to swap out models or at least floor plans that you're offering in your communities. Is that something that we could expect you to do in communities that are currently open, or are we really looking at communities that are going to be new communities opening up? Maybe give us a sense for what share of the of the communities you will have open, let's say for the spring selling season, will have a revamped product line?
Mike Murray
In most of our communities across the country, Steve, we'll be able to start back smaller homes primarily and change specification levels in those homes that have been starting in the most recent quarter and will be starting in the first quarter. There are some communities that are a little more locked in on product and planned neighborhood phases. that it may take three to six months to work through some changes in the product offerings. But by and large, most of our communities, those changes are starting today, and we'll continue to see that roll out through the next six to nine months.
Tom
Steven, even within the product lines that we've been offering, as a spec builder, we release certain houses every month. And so when the market is running red hot like it was first half plus of last year, you have a tendency to release the bigger houses because that dollar's profit per house is higher. When the price point becomes much more important to the buyers, the release, they go from the 2,300-square-foot two-story down to the 1,600-square-foot ranch, which drops the overall ASP in that community. without really changing the product or impacting valuations within the community.
Stephen Kim
Great. That's really helpful. Thanks so much, guys.
Tom
We control that by which houses we release into production.
Stephen Kim
Yeah. Great. Thanks very much, guys.
Operator
Thank you. The next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead.
John Lovallo
Good morning, guys. Thank you for taking my questions. First one is, you know, the first quarter order guide implies quarter over quarter improvement, which would sort of buck normal seasonality. Can you just help us with some of the puts and takes there?
Mike
Well, really, we're just looking at Our plans and what we're seeing right now week to week, we're already five weeks into our quarter, so we've got one month in the books. And as we just look at our pace that we're seeing right now, we believe that that's where we're going to wind up. Obviously, seasonality, if you look at history, has been a little bit unusual the last couple of years. and I think we're still in a little bit of an unusual time with what has happened with rates. But with our positioning across the board, with our community count increasing, we feel like our order position in Q1 is in line with what we got.
Jessica Hansen
And as our production's gotten further along as well, we felt more comfortable loosening up a lot of the sales restrictions you've heard us talk about. Even though we're continuing to sell later in the process with some, you know, negligible improvement on our cycle times, but getting further along in those construction cycles, we have more homes available for sale going into Q1 than we've had.
John Lovallo
Makes sense. Okay, great. And then the ASP in the fourth quarter down about 4% sequentially, how much of that was was like for like pricing versus mix?
Mike
Yeah, at this point, it's like for like. I mean, as we said, we're increasing incentives. And then where necessary, community by community, we're adjusting prices. And so I don't believe there's necessarily been a big change in makes yet. And so it's more likely from like for like.
John Lovallo
Got it. Thank you, guys. Thank you.
Operator
The next question today is coming from Carl Reichart from DTIG. Carl, your line is live.
Carl Reichart
Please go ahead. Thanks, Mornit, buddy. You talked about cutting base prices where necessary. Can you give me a sense of how often it's been necessary, maybe percentage of communities or percentage of orders this quarter where base prices were cut, and what level of cuts are creating some elasticity in unit demands?
spk06
Carl, I don't know that we can get specific on terms of communities or by area. We are finding the market community by community and market by market. Those cuts on base have not been significant to this point. We have focused on financial incentives and interest rate, and where needed to, we've been able to adjust price and find the market to drive additional traffic and sales.
Jessica Hansen
And a lot of our guide is coming from what we know we're going to put into the market in terms of when we are opening new communities or new phases, we can reset our base pricing that way. And so we do expect our ASP to shift down throughout the year. But as Paul mentioned, to date, it's been more heavily incentivized than it has been base price cuts.
Carl Reichart
Okay. Thank you, Jess. Thanks, Paul. And then on cycle times, starting to see a little bit of easing and working with the trades and suppliers. Would your guess be that your cycle times could get to sort of normal pre-pandemic levels in fiscal 23, or is that too much to hope for at this point?
Mike Murray
You know, anecdotally, I was talking to a builder last week. He said he started a house in late August, and he's going to close it in December. So he was pretty excited about that. That's one story, one house out of a lot of houses. Okay.
Jessica Hansen
And builder equals construction superintendent, our employee.
Mike Murray
And he was really excited about that. So I think we're making the right progress. We're starting to see a little bit of progress pick up in the numbers of October completions. We got a little bit of time back there. You know, getting all the way back to where we want to be pre-pandemic levels, it might be by the end of the year for the starts that we have later in the year that we're pushing it through, but we're going to make that progress this year.
Tom
You know, Carl, we've talked about it, I think, for a while, but... Just the discipline in the industry today has translated into, across the board, slow down and start. And I think it will allow the trade-based material suppliers to kind of get the feet under them. You know, I've been accused of being overly optimistic at times, but I do think 2023, if the industry stays disciplined, we will get back into a situation where we can sell a house, know what it's going to cost, and when we're going to be able to deliver it. And that will be a good thing.
Carl Reichart
Well, it starts with one house. So I appreciate the color, guys. Thanks so much.
Jessica Hansen
Thanks, Carl.
Operator
Thank you. Your next question is coming from Mike Rehout from JPMorgan. Mike, your line is live. Please go ahead.
Mike
Great. Thanks. Thanks very much. Appreciate you taking my questions. First off, just wanted to get a sense of the cadence and progression of incentives as it works through your fiscal fourth quarter and into October and perhaps even into November. Obviously, a lot of that I would presume is being reflected in the first quarter gross margin guidance. But what I'm trying to get a sense is just the degree of magnitude of the change in trend and how we should be thinking about perhaps where incentives are today versus where they were three or four months ago.
Mike
I think it starts with just taking a step back and looking at where interest rates were. At the end of the last quarter, mortgage rates were still in the low to mid fives. And by the end of the quarter, they were in the high sixes. And subsequent to the end of the quarter, they've now stepped into the sevens. And so we have been adjusting to reflect that. A lot of our incentives have been on the financing side with interest rate locks and buy downs to try to address the payment shock there from the interest rates. And that has increased sequentially through the quarter and has continued into October. So the levels have continued to increase. We were focused on ensuring that we could close our backlog because we did have a lot of homes scheduled to close in September. And so I believe we did hold off on some price adjustments to ensure that we could close that backlog. And so price adjustments have started to fold in a little more commonly as we've stepped into Q1. So it's been a sequential increase along the way. And then what it will be going forward will depend largely on what happens with rates in the market and then our efforts to meet the market. We are looking community by community to make adjustments in order to hit our sales pace and turn our inventory and maximize our returns. And so we're looking to find the market and find that pace community by community.
Mike
So, you know, I guess... You know, I appreciate that answer. I know, obviously, projecting gross margins beyond the first quarter is somewhat difficult, but it would seem like, you know, given the trend, that we're not yet at a point of stabilization. I guess my second question, and if you have any thoughts on that, that would be great, I guess. But second question, just on the SG&A guide for the first quarter, you know, with consolidated revenue being – you know, a little bit below, obviously it's not a surprise to see the SG&A come up. I'm also wondering if there's anything in that number around increased broker commissions to the market as part of, you know, encouraging the broker community in a softer environment and how we should be thinking about that line item within SG&A over the next year.
Jessica Hansen
Sure, Mike. So builders report those things separately or differently, I should say. So broker commissions for us are actually in gross margin. So that is contemplated as one of the increased incentives in our gross margin guide and not an impact for us, particularly on SG&A.
Mike
In terms of SG&A overall, with our ASPs expected to come down, with revenues down a bit, that's driving an expected increase in our And our SG&A has a percentage of revenues. We're coming off of all-time lows there and are still positioning ourselves to continue to gain market share. And so with essentially SG&A spend staying relatively stable, with the exception of variable SG&A that moves with revenues or with profitability, that's resulting in the expected increase from all-time lows to a little bit higher level as percentage of revenues in Q1.
Mike
Great. Thanks so much. Thank you.
Operator
And the next question today is coming from Matthew Bully from Barclays. Matthew, your line is live. Please go ahead.
Matthew Bully
Good morning, everyone. Thank you for taking the questions and for all the detail. Just a follow-up on the incentive side. I think I heard you say at the top that within financial services you were including some, I think you said, rate buy-downs and things like that. So in the incentive comments you just made around reaching six or seven, I think I heard you say, is that all in the gross margin, and is there additional incentives on the financial services side that we should look out for, or is that kind of all in? Thank you.
Mike
There's always some of those costs on both sides, Matt, and that can vary a bit, you know, depending on the nature of the incentives. But yes, both of our guides, the guides for financial services margins going into Q1, as well as the guide for our gross margin on the home building side, reflect our anticipation for our level of incentives related to financing.
Matthew Bully
Understood. Okay, thanks for that clarification. And then, um just secondly uh you know you mentioned that you would i think i heard you say you you would expect um you know the option uh abandonments that occurred this quarter to kind of continue to occur i mean should we expect the magnitude of that to increase and then just kind of any update on actual impairment thoughts around your your own land portfolio with the option write-off cost as we evaluate projects at various decision points
Mike Murray
we'll be working with various land sellers and developers, and where we can't reach an agreement or accommodation, we're not gonna move forward with a bad deal. So if it doesn't make sense in what we expect the market conditions are or will be over the life of the project, that's the reason we have the option arrangement. So we may have an increase in those costs, but we do take a pretty accurate look at those things, very realistic expectation, and we'll be very quick to move on those.
Tom
I'll just add, both when the market was accelerating and now at a center pause, we are very disciplined in how we approach every economic decision on the land side. It's all about creating optionality and efficiency of capital, and that's been our program, and it's going to continue to be our program.
Jessica Hansen
In terms of your impairment question, even with our guide for gross margins today, we're still projecting for our gross margins to remain at very healthy levels. That would signify that we're a long way off from any sort of broad-based impairments. We're also in a completely different financial position this cycle to prior cycles, which allows us some flexibility in terms of how we look at the land that we have on our balance sheet and what we plan to do with it going forward. That being said, we do expect there to be some impairments along the way in weaker submarkets, but right now don't expect anything broadly based in the near term.
Matthew Bully
Makes sense. Thanks, Jessica. Thanks, everyone. Good luck.
Operator
Thank you. And the next question is coming from Eric Bossert from the Cleveland Research Company. Eric, your line is live. Please go ahead.
Eric Bossert
Thanks. Context, if you could, around two things. First of all, the 23% to 24% gross margin in 1Q, obviously a component of that is what's going on with incentives and pricing. You talked today about savings on the cost side or changing the product mix. And so what I'm trying to understand is, is that a baseline? The changes that you're making to support gross margin or change mix, can that number improve? Can you just give us a little bit of sense of what's contributing to that and in terms of the things you're doing to protect gross margin, what the path forward might look like?
spk06
Yeah, Eric, I think as we are out in the market with our trade partners and suppliers, working to reduce costs to provide the best value we can to our homebuyers. And we provided the visibility into the first quarter with those gross margins. What we're seeing, which is encouraging early on in that, isn't going to come through in homes that close for the next six to nine months towards the end of the year. So we've still got the homes that we have in the ground with that cost structure. But as we continue to find the market, we expect to see gross margins like we have guided to in the first quarter.
Tom
And we did suffer through extended bill cycle times. So the houses will be closing in Q1, our houses that were started, and bear the cost of high lumber costs. really, uh, trade shortages. So you've got the, you've got the double whammy of high cost and, uh, uh, a more normalized, uh, ASP.
Eric Bossert
Okay. And just, and just within that is, is like today, can you comment? Is that, is that the floor or is there both upside and downside through the rest of the year relative to the one to gross margin?
Tom
It depends on what the capital markets and interest rates do. I mean, it's, If we see stabilization in interest rates, I feel very optimistic about what we can do this year. If we continue to see 100 basis point increase quarter to quarter to quarter, I think it's going to be a very challenging year.
Eric Bossert
Okay. And then secondly, you mentioned single family for rent, both of what you're doing and buyers of your homes from others. I'm just curious if you can give us a sense of how much of the business is single-family for rent, what the expectation is in 23, and if there's any risk or volatility around that buyer group.
Mike Murray
So our approach to the single-family rental business is to build communities of traditional single-family homes, rent those up in stabilization, and then sell them to typically institutional owners of that sort of residential asset class. It's about $1.7 billion, I think, is our current investment in the single-family rental platform. We expect that's going to grow during 2023. Depending upon market conditions, probably not more growth than we had from the end of 2021 to the end of 2022, but we do expect growth in 2023. And we still see that when we complete the homes and they go to market to lease, there's still good demand and people are needing a place to live, and they're choosing to live in these communities.
Operator
Okay, thank you. Thank you. The next question is coming from Alan Ratner from Zellman and Associates. Alan, your line is live. Please go ahead.
Alan Ratner
Hey, guys. Good morning. Thanks for all the great detail in a difficult market to forecast out here, so we appreciate it. I guess first question, you know, just trying to triangulate all the comments you made about the margin outlook, the goals, you know, as far as revenue are concerned in 23. If I look at your 1Q margin guide, it's down about 600 to 700 basis points from the peak a couple of quarters ago. I think that's largely consistent with the net price adjustments we've seen across the industry. As you think about that versus your goal to grow revenues for the year or even maybe the low end of that range, What's the price sensitivity to achieving that goal? How low are you willing to take that margin in the near term, recognizing that maybe longer term you have some potential cost relief coming or other things that could be offsets? But in order to hit your 23 target there, how low could that margin go before you kind of hold back and say, you know what, we're just going to slow the start pace. We're not going to chase that revenue growth because the price environment is too difficult.
Mike
Yeah, Alan, there's always a balance. We're always balancing what we're doing on pricing and incentives and what that results in, margin versus pace and turning inventory to generate the best return. And so we'll be trying to strike that balance across all our communities throughout the year. It's too early and too uncertain to know what the year may bring in terms of the macro environment, in terms of rates, in terms of the general economy, to know exactly what those decisions may need to be. And so that's why we're We're trying to provide as much color as we can around how we're looking at things, but in reality, we don't have really any specificity or visibility to what those conditions may be into the spring and into 23. So in terms of where the line is on where margin or pricing might need to go or what we're willing to do to push pace, I think remains to be seen. We're going to be making those decisions day-to-day, week-to-week as we march forward here.
Jessica Hansen
And as you know, we don't push or dictate that from a high level. It really is managed community by community, market by market, so we can make sure we're maximizing our returns at the local level and then blend it overall.
Alan Ratner
Okay. I appreciate the thoughts there. I guess on the rental segment, so I hear the delays in Florida, but I thought I also heard maybe a couple of projects that you thought would close this quarter that got pushed out because of, you know, presumably the higher borrowing costs that your counterparties are experiencing and how that impacts the underwriting. So I guess I'm just, you know, thinking out loud here, you know, you do expect growth in that segment and certainly the inventory has been building, but how concerned or not concerned are you about what's going on with, you know, borrowing costs for those investors? I mean, we're hearing that, you know, there's a bit of a, stalemate, if you will, or at least a widening bid-ask spread on the rental side as well, given the difficulty underwriting to the new borrowing costs. So what's the sensitivity for you to achieve that growth? Is there any risk to that if borrowing costs remain elevated?
spk06
Alan, we have certainly seen, you know, from that buyer base and, you know, the credit markets and their ability to borrow soften, but there's still plenty of buyers out there You know, like our buyers on the home buyer side, they're taking a bit of a pause in some cases just to evaluate the market. But we've got about 7,400 homes in production on the single family for rent side. And that's, you know, from beginning to those that are complete. You know, we still expect to see people in that market. Not everyone needs to be in the credit markets or borrowing to purchase. And our single family rental communities tend to be on the lower end side relative to apartment sizes. And so we still feel good about that business, but we certainly did see communities that we expected to be sold and closed in the fourth quarter push into the second quarter.
Alan Ratner
And when you look at your deals that are under construction or completed or close to complete, and if you underwrite those deals as if you're a buyer today, you're still seeing those penciling. In other words, you can make the math work and assume that a buyer theoretically can as well.
spk06
Yes, and we have been very conservative on our underwriting. We are really looking at each of those communities as we would on the for sale side. And so the performance we saw on the ones that we sold in the market a year ago and through the last year were far outperformed our underwriting. And so we still feel good about the position in the active communities that we have, and we will adjust as the market adjusts in terms of that business as we go forward.
Mike Murray
And more of the issue, I think, Alan, related to a change in that buyer. To say they were very excited would be an understatement to get their hands on the communities early in fiscal 22. We experienced some of the same construction delays in those products that we did in our single family for sale business. And we had expectations and buyer indications of interest willing to close on the projects prior to completion and prior to full stabilization. The market's come back and more normalized now, and their expectation is that we get to a stabilized point before we're going to get a good valuation.
Alan Ratner
If I could just sneak in one last one, and I apologize, but it's relevant to this topic here. In the environment where the capital markets remain tough and the borrowing costs continue to rise here, but you're still seeing good fundamentals at the community level, good occupancy, good rents, are you willing to shift the strategy in the near term and hold on to more of these assets on your balance sheet and wait for the transaction environment to improve? Or is the goal here really to turn the capital and you're not looking to necessarily grow a portfolio of stabilized assets?
Mike
Our base business model is to sell the assets. That still generally will generate the best return. But we're going to make sure that we stay in a position from a capital perspective to be able to manage timing, to manage a bit of a slower process if necessary due to some disruptions in the capital markets, which typically don't last that long. But we do want to make sure we stay in a flexible position to be able to manage timing when necessary.
Alan Ratner
Okay, perfect. Thanks for all the time, guys. I appreciate it.
Operator
Thank you. Your next question is coming from Buck Horn from Raymond James. Buck, your line is live. Please go ahead.
Raymond James
Yeah, thank you. Appreciate that. I was wondering if you could, anything you mentioned the cancellation rate in October remained elevated. I was just wondering if directionally you could indicate whether that was, the cancellation rate was higher or lower than what happened in the fourth quarter, you know, in October.
Jessica Hansen
Yeah, we typically have volatility month to month in our can rate throughout the quarter, so we don't give it specifically for the month. But, you know, anything for us above the, call it low 20s, high teens to low 20s is elevated. And we certainly did not see any market improvement in October as compared to Q4.
Raymond James
Okay, appreciate that. And can we talk about any just regional differences in terms of how buyer traffic and interest levels have behaved as, you know, the progression of interest rates kind of marched higher, you know, either during the quarter through October, just kind of, just kind of walk us through the map and just kind of where things are, you know, how buyers are behaving in different geographies.
Mike Murray
We've seen, you know, still see a lot of traffic in our models. We still see people coming in looking to get into a home, a little more challenging with the affordability sometimes to get them qualified. But, uh, As we see stabilization in rates and when we see periods when rates have stabilized and that demand is there, we're able to meet it. We do see in our sales processes that we're selling the large majority of our homes past a certain stage of construction, not just from our restriction of that sale, but from the buyer wanting certainty of what that interest rate payment can be within the lock window that can be afforded to them. And so that's been important for us to accelerate the cycle times have more inventory later in the production process that we can deliver within the interest rate lock window.
Raymond James
Right. I'm just curious, are these pockets of strength kind of geographically?
Tom
Just from geographically, it's the same markets that are experiencing inflow of buyers. I mean, I think our relocation buyers picked up last quarter again. The market is, I think, evolving, maybe is the best word. There is still a migration out of urban or out of urban into the suburbs. And there is still housing formation taking place that exceeds the supply of homes. You know, it's It's easy to get caught up in the short term. Our goal here is to stay focused on the long term. And I can tell you our efforts are in positioning for now Q2, Q3, Q4, and 24 and 25. And so we're trying to stay out of the short-term reaction, but where do we want to be? as this platform continues to develop, improve, and get built out.
Raymond James
All right, thank you.
Operator
Thank you. And the next question is coming from Susan McClary from Goldman Sachs. Susan, your line is live. Please go ahead.
Susan McClary
Thank you. Good morning, everyone. My first question is, going back to the land market a bit, can you talk about what you're hearing from the sellers And how are the renegotiations of some of those option contracts coming together? What is the pushback that you're getting, if there is any? And how is that progressing and changing as the market is changing?
spk06
Yeah, Susan, we have, you know, been very proactive with our land sellers and development partners and realistic in terms of expectations with the market as it moves. So, Largely, they have been understanding and working with us to keep those deals alive where we can. To the extent that it just, the underwriting doesn't make sense, then we're having to make the decisions that we are. And we will, if needs be, have to walk away from some of those options. But that's why we have the option contracts in place and have made that shift with our land strategy. But by and large, they are reading the headlines like everyone else and understanding of where the market is. want to be in a position to move through those lots, and so have been relatively well-received and receptive to come to the table and talk.
Tom
And we treat or attempt to treat our development partners like they're a part of the family. I mean, we're very transparent with them. They understand where we're headed and what our start pace is and what our expectations for that community is. And coming out of the last downturn, We built relationships that are still existing today. And our goal in every community, every division, is to be kind of the favored nation builder. And we are going to treat them better. So we really do believe in transparency and consistency and honest and direct communication. And that's how you build relationships.
Susan McClary
Yes, okay. And then can you talk a bit about capital allocation? As the market is changing, how are you thinking about the different uses of cash, and especially maybe any thoughts on buybacks as we think about 2023?
Mike
You know, Sue, we'll continue to take a balanced approach to it all. We're in a good, flexible position to be able to continue to provide returns to our shareholders, both in the terms of increased dividends and share repurchases. Obviously, we'll be adjusting in our business and how much we invest into land and to home starts and into our rental business based on market conditions. But at a base level, we do expect to generate an increase in our home building cash from operations in fiscal 2023. And with that, that gives us even more flexibility to make those investments. relative decisions, but continue with more of the same in terms of the balance and the consistency in the approach.
Susan McClary
Okay, thank you. Good luck.
Mike
Thanks, sir.
Operator
Thank you. And that is all the time we have for questions this morning. At this time, I would like to turn the floor back to David Auld for closing remarks.
Tom
Thank you, Tom. We appreciate everybody's time on the call today and look forward to speaking with you again to share our first quarter results in January. And finally, congratulations to the entire D.R. Horton family for another remarkable year. Stay humble, stay hungry, stay focused. Go compete and win every day. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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