D.R. Horton Inc (DHI) — Q1 2021 Earnings Call Transcript

Thank you, Christine, and good morning. Welcome to our call to discuss our results for the first quarter of fiscal 2021. Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K which is filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q 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 Presentations 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. I'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer, and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team delivered an outstanding first quarter, which included a 98% increase in consolidated pretax income to over $1 billion, a 48% increase in revenues to $5.9 billion, and a 56% increase in net sales orders to 20,418. Our pretax profit margin for the quarter improved 440 basis points to 17.4%, while our earnings increased 84% to $2.14 per diluted share. Our homebuilding return on inventory for the trailing 12 months ended December 31 was 28%, and our consolidated return on equity for the same period was 24.4%. These results reflect the strength of our homebuilding and financial services teams, our ability to leverage D.R. Horton scale across our broad geographic footprint, and our product positioning to offer homes at affordable price points across multiple brands. Housing market conditions remain very strong, and our teams are focused on maximizing returns and improving capital efficiency in each of our communities while increasing our market share. However, we remain cautious regarding the impact that the COVID-19 pandemic or other external factors may have on the economy and our operations in the future. We believe our strong balance sheet, liquidity and experienced teams position us very well to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offering, incentives, home prices, sales pace and inventory levels to optimize the return on our inventory investments. With 42,100 homes in inventory, an ample supply of lots and continued strong sales trends in January, we are well positioned for the spring selling season and the remainder of 2021.

Earnings for the first quarter of fiscal 2021 increased 84% to $2.14 per diluted share compared to $1.16 per share in the prior year quarter. Net income for the quarter increased 84% to $792 million compared to $431 million. Our first quarter home sales revenues increased 48% to $5.7 billion on 18,739 homes closed, up from $3.9 billion on 12,959 homes closed in the prior year. Our average closing price for the quarter was up 2% from the prior year at $304,100, and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable.

Net sales orders in the first quarter increased 56% to 20,418 homes, and the value of those orders was $6.4 billion, up 62% from $3.9 billion in the prior year. We sold 7,292 more homes this quarter than the same quarter last year, supporting our plan to achieve further gains in market share and scale during fiscal 2021. Our average number of active selling communities increased 3% from the prior year quarter and was up 1% sequentially. Our average sales price on net sales orders in the first quarter was $314,200, up 4% from the prior year. The cancellation rate for the first quarter was 18%, down from 20% in the prior year quarter. We are pleased with our sales pace to date in January, and have seen the volume improvement we expect as we head into the spring selling season. We remain well positioned for increased demand with our affordable product offerings, lot supply and housing inventories.

Our gross profit margin on home sales revenue in the first quarter was 24.1%, up 140 basis points sequentially from the September quarter and up 310 basis points compared to the prior year quarter. The sequential increase in our gross margin from September to December exceeded our expectations and reflects the broad strength of the housing market across almost all of our markets. We continue to see very strong demand and a limited supply of homes, especially at affordable price points, and we still have pricing power and are currently using very few sales incentives. On a per square foot basis, our revenues were up 4% from the prior year quarter, while our stick-and-brick cost per square foot was down 1.5%, and our lot cost per square foot was up 4%. Sequentially, our revenues were flat on a per square foot basis, while our stick-and-brick cost per square foot decreased 1.5%, and our lot cost decreased 1.5%. Although we didn't see the impact of rising costs in our December quarter, we do expect both our construction and lot costs will increase on a per square foot basis in our homes closed next quarter. With the strength of today's market conditions, we expect to offset these cost pressures with price increases and currently expect our home sales gross margin in the second quarter to be similar to the first quarter. We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.

In the first quarter, homebuilding SG&A expense as a percentage of revenues was 7.9%, down 130 basis points from 9.2% in the prior year quarter. The improvement in our SG&A ratio this quarter was better than our expectations and was due to strong leverage driven by our higher-than-expected volume of homes closed and the increase in our average selling price. Our homebuilding SG&A expense as a percentage of revenues is at its lowest point for our first quarter in our history, and we remain focused on controlling our SG&A, while ensuring that our infrastructure appropriately supports our business.

We ended the first quarter with 42,100 homes in inventory. 16,300 of our total homes were unsold, of which 1,600 were completed. We also had 1,900 model homes at the end of the quarter. Due to our strong sales in the second half of fiscal 2020 and the first quarter of fiscal 2021, our level of unsold and completed unsold homes is lower than in recent years. We have accelerated our pace of home starts across most of our communities in the past two quarters to ensure we maintain an adequate number of homes to meet demand. During the first quarter, we started 22,800 homes. We have made good progress increasing our homes in inventory, and we expect to increase them further in the second quarter as we enter the spring selling season. At December 31, our homebuilding lot position consisted of approximately 441,000 lots, of which 28% were owned and 72% were controlled through purchase contracts. 30% of our total owned lots are finished and at least 47% of our controlled lots are or will be finished when we purchase them. Our growing and capital-efficient lot portfolio continues to provide us a strong competitive position, allowing us to start construction on more homes to meet homebuyer demand.

For first quarter homebuilding investments in lots, land and development totaled $1.95 billion, of which $1.13 billion was for finished lots, $490 million was for land development and $330 million was to acquire land. $290 million of our lot purchases in the first quarter were for Forestar.

Forestar, our majority owned subsidiary is a publicly traded residential lot manufacturer operating in 51 markets across 21 states. Our strategic relationship with Forestar has a well-capitalized lot supplier across much of our operating footprint is serving us well and is presenting opportunities for both companies to gain market share. Forestar is delivering on its high growth expectations and now expects to grow its lot deliveries by 30% to 35% in fiscal 2021 to a range of 13,500 to 14,000 lots. At December 31, Forestar's lot position increased 74% from a year ago to 77,500 lots, of which 52,300 are owned and 25,200 are controlled through purchase contracts. 67% of Forestar's owned lots are already under contract with D.R. Horton or subject to a right of first offer under our Master Supply Agreement. Forestar is separately capitalized from D.R. Horton and has approximately $580 million of liquidity, which includes $240 million of unrestricted cash and $340 million of available capacity on its revolving credit facility. At December 31, Forestar's net debt-to-capital ratio was 31.8%. And their next senior note maturity is in 2024. With low leverage, ample liquidity and its relationship with D.R. Horton, Forestar is in a very strong position to grow their business and navigate through changing market conditions.

Financial services pretax income in the first quarter was $84.1 million, with a pretax profit margin of 44.9% compared to $30.5 million and 29.6% in the prior year quarter. Our mortgage company has continued selling the mortgages it originates at strong net gains. We began retaining servicing rights on a portion of our FHA and VA loan originations in the third quarter last year because of lower valuations offered by mortgage servicers due to the uncertainty of the impact of the CARES Act. Servicing values have since improved, and we sold a portion of our retained servicing rights during the first quarter. We expect to continue retaining some servicing rights prior to selling them to third parties, typically within six months of loan origination. For the quarter, 97% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 68% of our homebuyers. FHA and VA loans accounted for 50% of the mortgage company's volume. Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 719 and an average loan-to-value ratio of 90%. First time homebuyers represented 56% of the closing handled by our mortgage company, up from 50% in the prior year quarter.

At December 31, our multifamily rental operations had four projects under active construction and an additional four projects that are in the lease-up phase. These eight projects represent 2,325 multifamily units. Based on our pace of leasing activity, we currently expect to sell two projects during the second half of fiscal 2021. Our multifamily rental assets totaled $294.3 million at December 31. And as we mentioned on our last call, we are constructing and leasing homes within single family rental communities. After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is expected to be marketed for sale. Our single-family rental operations are currently reported in our homebuilding segment. During the quarter ended December 31, we completed our first sale of a single-family rental community, representing 124 homes for $31.8 million, resulting in a gain on sale of $14 million. We currently expect one more sale of a single-family rental community later this fiscal year. At December 31, our homebuilding fixed assets included $106.6 million of assets related to our single-family rental platform, representing 13 communities totaling 890 single family rental homes and owned finished lots. We still expect our total investments in our single and multifamily rental platforms to more than double during fiscal 2021.

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the three months ended December, our cash used in homebuilding operations was $269.2 million compared to $178.4 million in the prior year period. At December 31, we had $3.9 billion of homebuilding liquidity consisting of $2.1 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities. We plan to continue maintaining higher homebuilding cash balances than in prior years to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions. During the quarter, we issued $500 million of 1.4% senior notes due in 2027, and we repaid $400 million of 2.55% senior notes at their maturity. Our homebuilding leverage was 17.3% at the end of December with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months. At December 31, our stockholders' equity was $12.5 billion and book value per share was $34.33, up 23% from a year ago. For the trailing 12 months into December, our return on equity was 24.4% compared to 18.2% a year ago. During the quarter, we paid cash dividends of $73 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in February. We repurchased one million shares of common stock for $69.8 million during the quarter and our remaining outstanding share repurchase authorization at December 31 was $466 million.

In the second quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $6 billion to $6.2 billion and our homes closed to be in a range between 19,000 and 19,500 homes. We expect our home sales gross margin in the second quarter to be similar to the first quarter and our homebuilding SG&A as a percentage of revenues in the second quarter to be approximately the same as the first quarter. We anticipate a financial services pretax profit margin in the second quarter of 40% to 45%, and we expect our income tax rate to be in the range of 23% to 23.5%. For the full fiscal year of 2021, we now expect consolidated revenues of $25.2 billion to $25.8 billion and to close between 80,000 and 82,000 homes. We expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for our homebuilding cash flow this year, as we prioritize augmenting our housing and land and lot inventories to support higher demand. After reinvesting in our homebuilding business, our cash flow priorities include increasing our investment in both our multifamily and single-family rental platforms, maintaining our conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to keep our outstanding share count flat year-over-year.

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

Thanks. Good morning, everybody. Happy New Year. I wanted to talk a little about your underlying costs. Thanks for the info on stick-and-brick and land. Can you talk a little bit about what you're seeing in the labor market, David? We're starting to hear a little more, a few builders starting to say things are easing, some others are telling us things are tougher. And oftentimes, you'd like to talk about specific trade specific markets. But I'm interested just broadly, what your expectations are for the labor shortage beginning to ease or tighten in 2021?

I don't see it being much different than it's been in 2020, at least not for us. We set up and try to drive our communities in the most efficient way, making it as easy as possible for our trades to get in and out and get their job done. We've actually, I think, through this cycle, have been focused on the labor side and have created a lot of efficiency and have expanded our trade base just by making it easier for them to get in and get out and complete their jobs. For 2021, our volume is ramping up. I think that's going to continue to be a challenge. But we feel very good; I mean, we wouldn't be selling houses if we couldn't build them.

Fair enough. And then I wanted to ask a little bit about the West region, which the growth is slower than the really significant growth you're seeing in other places, and inventory is down sequentially as well. In the meantime, South Central, you took more order dollars this quarter than you did last quarter. So I'm curious if you're thinking about shifting capital investment among the different regions as you look into 2021 and beyond. Is there a de-emphasis happening in the West? Or is this slowdown just a function of being out of product and out of communities? Thanks.

The underwriting in the West is much more difficult; timelines are longer. So through this cycle, our community count has continued to decrease there. I will tell you, we have one of the best groups of people in the company in the West region. When we talk about platform, we talk about people, product price, and we certainly have a very strong platform out West. When the returns in Texas, Florida, and the Carolinas have been incredible, everybody competes for capital in this company. So I will say the West is an area that I personally plan to emphasize this year, and I think you'll see the growth return there.

Carl, for reference, it will be posted after the call, but our West region community count was down 9% year-over-year and 10% sequentially, which compares to the company average, which was actually slightly up in both periods.

That will do it, Jessica. All right. Thanks so much, everyone, congrats.

Good morning, guys. And thank you for taking my questions as well. The first one, just on the NAHB had noted that builder respondents were growing more and more concerned with affordability and home price appreciation and also with rates sort of grinding higher. And maybe not specific to D.R. Horton, but for the industry, I mean, how are you guys thinking about this dynamic? And do you see any risk to industry-wide demand as the spring approaches here?

John, this is Mike. Good morning. We're always focused on affordability; that's something that's consistent across the platform. And I'm not as well versed to speak to the industry. But in our communities, we're focused on providing value at whatever price point we're at. And so whether we have buyers moving up from their current housing situation to a D.R. Horton home or they are first-time homebuyers with 56% of our buyers in the quarter being first-time homebuyers. We're focused on providing an affordable home that fits their monthly budget.

We continue to see healthy credit metrics across that buyer group. Our FICO score was 719 this quarter. I think on our Express brand standalone, it was almost 710. And then, as we also mentioned on the call, our average square footage has continued to tick down slightly year-over-year. And as home prices have risen, what we typically see is first-time buyers want to buy as much home as they can get for their money, and they're buying out of need, not as a discretionary purchase. If home prices have risen, they just buy a little bit less house.

Yeah, that makes a lot of sense. And then, how are you guys thinking about the potential for increased environmental regulations under the Biden administration? And what this could mean for land development costs and timelines, things of that nature?

Well, I don't think it's going to help affordability. I believe it's going to extend timelines. We're well positioned with owning control over 400,000 lots. Again, we're going to focus on affordability. As regulations increase, affordability is going to become more challenging. But given our position and our people, I think we're - we can meet that challenge.

Thanks very much, guys.

Thanks, John.

Hey, guys. Fun times. It's interesting the way sometimes the builders are traded; it makes it seem like people think you're just the beneficiary of good luck. But I'm reminded about that statement, you know, luck is what happens when preparation meets opportunity. You guys have done a great job over the last couple of years preparing for this situation. I wanted to ask you about your comment regarding capital allocation because you indicated there that you are wanting to carry higher cash levels than normal for the foreseeable future. I think you made reference to some uncertainty in the current environment. But arguably, homebuilding is always difficult to predict. What is a good rule of thumb for modeling your cash levels going forward and what sorts of things are you looking to fade or dissipate, in order to pave the way for you to hold lower cash levels than that?

Sure. Good question, Steve. Just to get to the point in terms of expected levels, we would expect at each quarter end to maintain at least $1 billion of homebuilding cash, but would expect most quarters to see between $1.5 billion and $2 billion. I would say the primary driver behind that shift over the last year is we've been building a little bit more. It's just a significant increase in volume and scale and activity, which feel like it's prudent to ensure that we have sufficient cushion to manage significant sudden changes in the business that could avoid potential liquidity crunches. That just gives us that much more flexibility to respond when we see opportunities in the market. We've seen significant shifts in our business over the last few years, from a sharp increase in interest rates that decreased demand in late '18 to the pandemic disruption in the spring of 2020, to then the very significant increase in demand that we saw in the summer of 2020 and ever since. So from that standpoint, having a bit more cushion, a bit more liquidity to respond, whichever direction we need to go in the business, we just feel like it's prudent. I don't see us changing that strategy. I think that just puts us in a very strong and flexible position to respond to market changes.

Okay. Yeah. Certainly sounds like we ought to be modeling that on a longer-term basis. Okay. Second question relates to the pretty impressive margins you all reported this quarter. I think you just gave guidance as to that margin fairly recently. A lot of folks are just curious, as to what drove the upside in your margin this quarter? Paying note to the fact that your guidance for the March quarter suggests that it's more than just a temporary spike. I personally think you're still being conservative, but I'd love to hear what drove the upside surprise in this quarter.

Well, Steve, I'd say the first thing we expected to see this quarter that we did not as we've been seeing cost increases coming into our business over the last quarter or two, and we expected to see a bit more of that come through in our closings in Q1, which we did not. That's still coming. We can see it coming through our backlog, and we expect to see some of those cost increases start to hit our margins in the coming quarters. That being said, we still have a very strong environment, obviously with the ability to raise prices and very low incentive levels. So, we do expect at this point now with that additional visibility of another quarter to be able to maintain the current margins that we're showing, which obviously are very strong levels.

We've really had price protection on the prior cycle on the material front. We've seen very neutral impact from materials other than a little bit of headwind from lumber last year. Lumber is starting to pick back up. So that's going into our commentary as well. But really, it's a function of home prices rising significantly and building product companies having cost inflation as well. We're experiencing some increases in material costs that we didn't see, as we said, flow through in the December quarter, but we do expect those to start flowing through in the rest of the year.

I'll just add, our operational teams are doing a great job controlling costs. Where we see increases, we look for efficiencies to reduce costs. To be honest, I think we were a little surprised that stick and brick per foot actually went down last quarter. That's just a phenomenal job by our people.

Absolutely, great. Thanks very much, guys. And best of luck.

Thanks, Steve.

Good morning. Congrats on the quarter. And thanks for taking the questions. I wanted to ask about the lot position of 441,000. I think you said it really suggests a material addition during the quarter. Could you speak at a higher level, just around what that signals around your view of the sustainability of housing demand? And the color around the lots you added during the quarter, kind of duration of those lots, lot inflation, any of that could impact 2021?

Sure. Most of that addition to the lot position did come in the form of options lots. We continue to significantly increase our option lot position. We had noted on our last call that we do expect our owned lot to increase modestly and that they did get back to a normal level. We've been on an ongoing effort to expand our relationships with developers across the country. Of course, our relationship with Forestar continues to bear fruit as well. So, a significant portion of the additions to our lot position through options came from our third-party developers and our relationship with Forestar. With the significant growth we've seen in demand and significant volume increases, we certainly want to make sure we stay in a position to maintain.

The volume we see today, as well as looking forward to the medium term, we just don't see a lot of overbuilding or excess supply in the marketplace relative to household formation demand. We want to maintain, as Bill said, adequate support of inventory for that medium term land. That's why you're seeing our controlled lot position increase.

The fact that we're still heavy on options does allow us to be a little more aggressive in tying things up. So it's, again, positioning for the future.

Very capital-efficient with the options.

Okay. Got it. That's very helpful color. Second one, I wanted to ask about ASPs. I think, Bill, you might have mentioned or I think you said the order ASPs of 314, I think the backlog ASP is right there as well. So I'm just curious, number one, like-for-like versus mix, if that's just perhaps Emerald getting a lot better. Number two, if I look at the closings and revenue guidance for the year, it seems to suggest that the closing ASPs settled back down a little bit. I'm just wondering if you can reconcile that and just how to think about closing ASPs for the year.

We always see a higher ASP in our backlog than we do in our sales and our closings because higher priced homes generally are bigger and take longer to work their way through. So that's not necessarily unusual. Yes, so with our sales ASP being at 314 in this quarter, that's definitely showing a continuation of some price appreciation. In the near term, we would expect to see potential upside. That being said, our operators and our teams are very focused on providing affordability. We're going to keep an eye on the price points and the payments that our buyers need to afford to move into our homes. We never plan for significant price appreciation beyond a quarter or two because we always know that at some point, we will make some adjustments in our operations to ensure we keep our price points affordable.

And our ASP per square foot on a year-over-year basis was up 4%, but sequentially, it was actually flat.

The guidance doesn't reflect all of our price. It doesn't reflect quite all of that price. It reflects that we would continue to manage very closely on affordability.

Okay. Got it.

Thank you.

Good morning.

Good morning.

The increased delivery number for the year; curious what changed and where that changed and thinking a bit of geography and mix and also the production pace, but just sort of the things that changed that have resulted in you taking a little bit more optimistic on full year deliveries?

I think we've seen consistently strong demand across our footprint, Eric. In addition, as we've gotten the starts up in the first quarter, we started almost 23,000 homes with good visibility to start for the next couple of quarters. That gives us more confidence in the number we can deliver for the full year. It’s just a clearer picture coming into focus for what we're going to be able to accomplish.

We're also seeing a good start to the spring in January, which again, it's about confidence. We don't want to put a number out there that we don't feel really good about. So we feel good about that number.

From a production pace and inventory pace, anything different that you're doing there or have done there to also allow you to get more homes produced?

I wouldn't say it's anything different. It's just further execution of the same strategy of growing our capacity for production and growing our market share market-by-market. That's what our teams think about every day when they're getting up and going about their jobs is how to get a little bit better each day and gain a little more production capacity in their marketplace.

Great. Thank you.

Thanks, Eric.

Hey, guys. Good morning. Congrats on the great results. My first question, I was hoping to drill in a bit more on the land side, follow-up to Matt's question earlier. If I'm just kind of looking at the growth in your lot book and obviously account for all the closings you've had over the last year, it looks like over 40% of your current lot booked or lots controlled have actually been tied up over the last 12 months since the pandemic began. I'm curious, we hear from a lot of builders. When we underwrite land, we assume today's absorptions, today's pricing. The current environment makes that a little tricky because your margins and your absorptions are at cycle highs. I'm curious, as you look at the composition of the land you've tied up over the last 12 months, could you talk a little bit about how you're thinking about underwriting to gross margin to return on inventory to absorption, whatever metrics you guys think about internally and how that compares to where you're generating business today?

Our underwriting really hasn't changed much. As we've seen absorptions increase, it does - when we're requiring a two-year cash back at a 10 a month absorption, you can buy more lots than you can at a five a month absorption. We have seen the scale of the deals get a little bigger, but from a pricing and location standpoint, I don't see that we've given up much in the deals we're doing today versus the deals we were doing two or three, four years ago. Scale is bigger. The phase sizes are bigger. Lot prices have been pretty stable. When I'm traveling and looking at deals, the deals that we put on the books this quarter are better than most of the deals that we had on the books. It gives me a lot of confidence, and our guys are doing a great job. I don't see any deterioration in our lot position from marketability or even a pricing standpoint.

Got it. That's helpful color. Second question on the closing guidance for the year, I just want to maybe get a little bit more commentary there. If I look at your second quarter guide, your closings are going to be up just under 40% through the first half of the year. And for the full year guide, the midpoint is a 24% increase, which is incredibly strong. I'm curious what's driving that deceleration in the back half; is this a function of conservatism around cycle times and just the backlog conversions might be a bit lower than years past because of how elevated the backlogs are? Or is there something else that's driving the decrease in the back half?

It's really the stage of construction our homes are in, Alan. We have a lot fewer completed specs today than we typically have. As a result, we're selling and closing fewer homes intra-quarter than we typically would. I think that quarter that was in the mid-20% range and typically it's in the high 30% or 40% range. So it's a function of the stage of our inventory. We did get, as Mike said, almost 23,000 homes started this quarter, but a lot of those are still in the early stages of construction. Many of the homes that we'll be starting a bit later in the year won't be available for this fiscal year, but they'll put us in a very good position to continue growth in fiscal 2022.

When you look, obviously, at the year-over-year increases, we started to see some very significant year-over-year increases in Q3 last year. Q3 and Q4 were much more significant, so the year-over-year increases going forward are naturally not going to necessarily continue at the same pace they are right now. But we're expecting a very strong year, very strong year-over-year increase for fiscal '21.

Sure. Absolutely. That's helpful. Thanks, guys. Good luck.

Thanks. Good morning, everyone, and congrats on the results. First question, I kind of wanted to ask about the underwriting and the gross margins, maybe from another angle, and apologies if I'm beating a dead horse here. But with the gross margins at 24%, obviously, you almost have a very good problem to deal with in kind of keeping those margins extensively to the extent possible at these levels, which are kind of rarefied air for you historically. You mentioned earlier that you haven't seen much appreciation in lot prices, lot prices are being pretty stable, and the deal flow is pretty attractive right now. If home price appreciation were to moderate - obviously, it's in a high single-digit year-over-year dynamic on a same-store basis. If that were to moderate more to a low single-digit rate, given where you're underwriting the deals to today, should we expect that gross margin to come in a little bit over the next couple of years? Is that the right way to think about it? Or are there other factors that maybe we're not appreciating?

We really have no insight to gross margin in the next few years. Gross margin really is a function of the market, Mike. We're focused on underwriting to returns. And although we don't see it right now, even if we did see compression in our gross margins for whatever reason, affordability, interest rates, something that we don't foresee today as an issue, we can still generate attractive returns on our current land bank with the efficiencies that David's already talked to in our business and our ability to keep turning our houses. We feel comfortable with our current lot position that we're going to be able to offset costs going forward and hopefully hang around this 24% range. Further than a quarter out, we don't have a lot of visibility because we turn our houses much more quickly than the industry. We have the best early read on cost and gross margin in the market.

Can't emphasize enough that gross margin is not part of our underwriting hurdles; returns is our underwriting hurdle. Higher gross margins can generate higher returns, but we focus, first and foremost, on hitting returns, hitting our absorptions in each community. The market sometimes gives you more margin than you may have underwritten.

If you look at our average sales price, we are significantly more affordable than most of our peers in the homebuilding space. Our land portfolio and our operating structures are designed to drive that affordability. When I look at the competitive makeup out there, both of the resale market, which is really today's primary competitor at these price points and our peers in the industry, we feel good about our current position, which allows us to underwrite and execute the positions that we believe will keep us in this range.

Right. No, I appreciate it. I guess, secondly, I just wanted to zero in on SG&A for a moment. The results were significantly better than what you were looking for, I think, by order of about 100 basis points, yet your closings were only modestly above guidance. I'm wondering, you had mentioned leverage off of the strong volume, but you really had instead of 40 basis points, you know, 140 basis points of year-over-year leverage. And additionally, you're expecting SG&A ratio to be flat sequentially versus historically, a little bit better. I was wondering if there was anything specific to the first quarter, and I apologize if I missed this earlier, that benefited this past quarter more on a one-time basis? Or what kind of drove that differential?

Michael, thank you. You touched on part of it. Deliveries were a little bit ahead of what we had guided to. In addition to ASPs being a little higher, which drives a little more SG&A leverage. Something Jessica touched on is the lower level of completed inventory, especially the completed specs that we're carrying the business today, able to operate the inventory portfolio very efficiently. That requires less SG&A to maintain and care for those homes while they're sitting completed because we run those costs through SG&A. So as we have less of those, we had around 5,000 a year ago. Today, we have about 1,600. That's an improvement and a tailwind as well.

Although we guided to flat SG&A sequentially, on a year-over-year basis, it would actually be approximately 40 basis points of leverage, which is still a pretty nice move. When we think about it on an annual basis, as our SG&A is already at record lows, we're not going to be able to model and say that our SG&A is going to be down more than, say, that on an annual basis. Can we ultimately maybe get there if you continue to see prices rising? ASP plays a big role in that. Sure. But right now, leveraging our SG&A 40 basis points year-over-year is a robust move.

But nothing onetime. Yes, there are some changing conditions and the volume and pricing has helped, but nothing onetime in the quarter.

Right. Thanks so much, guys.

Thanks, Mike.

Thank you. So first question I just wanted to ask was around demand trends. A lot of folks are wondering demand has been so strong. What's it going to look like when life returns to normal? I'm just curious if you get from a high-level perspective, any evidence of the population migration that seems to be happening around the country. Are you seeing any noticeable uptick in out-of-state buyers or out-of-market buyers versus your historical norm? And has that changed at all one way or the other since the pandemic began?

The demand out there, I think, is really driven by demographics. I think it has been accelerated because of the pandemic and people's desire to find a safe environment for their family. I really don't see that demand issue changing. I mean, it's - it accelerates. It's a long-term program that got accelerated. Now that's going to stay. We are positioning. We are driving to take advantage of as much of that demand as we can. Right now today, it's very good out there.

A lot of our floor plans can already accommodate flex space. Depending on what a buyer is looking for today, whether it be a home office, a second home office, or a learning space for their kids. Those types of things, we already have floor plans that accommodate that. We can continue to adjust our starts based on what those homebuyers are looking for. The things that have always been true are as people start their families and have children, they generally want a backyard for their kids. They want good public schools, maybe a garage for their cars. Those things have kind of always been true that go along with the demographic side of the equation that David was talking about. I would say other than acceleration from the pandemic, and that's being positioned in the right places with a lot of different floor plans to choose from. No significant change on that front.

Still, the strongest demand is at the most affordable price.

And Buck, you didn't ask this specific question, but we've had numerous discussions over the last quarter or so about just the age demographics. For the last several years, there have been questions about whether millennials will ever buy homes, and we saw that move pretty quickly in the pandemic. You saw it settle out to where over 40% of our buyers are now 34 and under. I think answering the question, that yes, millennials are going to own homes.

Okay. That's great. That's - okay, go ahead, please…

Everything we're seeing has been the long-term trends that we've been experiencing really coming out of the downturn. COVID accelerated it. It feels like right now, that acceleration is kind of the new norm going forward.

That's extremely helpful. Thank you, guys. I appreciate all that color. And just one last one on the single-family rental business. You mentioned that you plan to double your investment in the platform over the course of this year. It sounds like there's quite a bit of scalable opportunity. How do you think about the total market opportunity for developing single-family rentals within your platform? Would you continue this method of building it yourself, pre-leasing it, and then flipping it stabilized? Or would you pre-sell some of these, or partner with investors ahead of development? How do you envision the scaling up of that business?

Where we are today with the program is we're still learning the business and the execution side of it. We were very pleased with the first transaction. As we learn more about the market, we will evaluate various alternatives for how we want to go about scaling it out and ultimately capitalizing it. We see a lot of opportunity. We believe some population segments desire a single-family lifestyle, but may not, for whatever reason, be purchasing a home. We want to build up to supply this.

To clarify, the comment about doubling our investment this year refers to our entire rental platform, both multifamily and single family. Our total assets and the combined platform at the beginning of the year was $330 million. We expect that to more than double in fiscal '21.

Got it. Got it. Thank you so much and congratulations.

Thanks.

Thanks.

Thank you, Christine. We appreciate everybody's time on the call today and look forward to speaking with you again with our second quarter results in April. To the D.R. Horton team, an outstanding first quarter. We're set up to have an incredible year. Stay humble, stay hungry, and stay focused. Thank you.