D.R. Horton Inc (DHI) — Q3 2021 Earnings Call Transcript

Thank you, Darrell and good morning. Welcome to our call to discuss our results for the third quarter of fiscal 2021. Before we get started, today's call includes 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 factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentation section under News and Events for your reference. Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team delivered an outstanding third quarter highlighted by a 78% increase in earnings to $3.06 per diluted share. Our consolidated pretax income increased 81% on a 35% increase in revenues to $7.3 billion, and our pretax profit margin improved 490 basis points to 19.4%. Our homebuilding return on inventory for the trailing 12 months ended June 30 was 34.9% and our consolidated return on equity for the same period was 29.5%. These results reflect our experienced team's new production capabilities, our ability to leverage the award and 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 robust and we are focused on maximizing returns and increasing our market share further. However, multiple disruptions in the supply chain combined with the improvement in economic conditions and strong demand for new homes have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction time to become less predictable. As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align our current production levels and our selling homes later in the construction cycle when we can better ensure the certainty of home close date for our homebuyers. We expect to work through these issues and increase our production capacity. We started construction on 22,600 homes this quarter, and our homes in inventory increased 44% from a year ago to 47,300 homes at June 30, 2021, positioning us to finish 2021 strong and to achieve double-digit growth again in 2022. We believe our strong balance sheet, liquidity and low leverage 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 home building operations and managing our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments.

Earnings for the third quarter of fiscal 2021 increased 78% to $3.06 per diluted share, compared to $1.72 per share in the prior year quarter. Net income for the quarter increased 77% to $1.1 billion compared to $630.7 million. Our third quarter home sales revenues increased 35% to $7 billion on 21,588 homes closed, up from $5.2 billion on 17,642 homes closed in the prior year. Our average closing price for the quarter was $326,100 and the average size of our homes closed was down 2%.

The value of our net sales orders in the third quarter increased 2% from the prior year to $6.4 billion, while our net sales orders for the quarter decreased 17% to 17,952 homes. Our average number of active selling communities increased 1% from the prior year quarter and was down 3% sequentially. Our average sales price on net sales orders in the third quarter was $359,200. The cancellation rate for the third quarter was 17%, down from 22% in the prior year quarter. As David described in this very strong demand environment, our local teams are restricting the sales pace in each of their communities based on the number of homes in inventory, construction time and lot position. They continue to adjust sales paces and prices to market on a community by community basis while staying focused on providing value to our buyers. Based on the stage of completion of our current homes and inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter. As a result, we expect our fourth quarter net sales orders to be lower than the third quarter. However, we are confident that we will be well positioned to deliver double-digit volume growth in fiscal 2022 with 32,200 homes in backlog, 47,300 homes in inventory, a robust lot supply and strong trade and supplier relationships.

Our gross profit margin on home sales revenue in the third quarter was 25.9%, up 130 basis points sequentially from the March quarter. The increase in our gross margin from March to June exceeded our expectations and reflects the broad strength of the housing market. The strong demand for a limited supply of homes has allowed us to continue to raise prices or lower the level of sales incentives in most of our communities. On a per square foot basis, our revenues were up 4.7% sequentially, while our stick and brick cost per square foot increased 3.5%. And our lot costs increased 1.7%. We expect both our construction and lot costs will continue to increase on a per square foot basis. However, with the strength in today's market conditions, we expect to offset any cost pressures with price increases. We currently expect our home sales gross margin in the fourth quarter to be similar to or slightly better than the third 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.

In the third quarter homebuilding SG&A expense as a percentage of revenues was 7.1%, down 80 basis points from 7.9% in the prior year quarter. Our homebuilding SG&A expense as a percentage of revenues is lower than any quarter in our history. And we remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports our business.

We have increased our housing inventory in response to the strength of demand and we expect the current constraints on our supply chain to ultimately subside. This quarter, we started 22,600 homes, up 33% from the third quarter last year, bringing our trailing 12 months starts to 94,500 homes. We ended this quarter with 47,300 homes in inventory, up 44% from a year ago; 15,400 of our total homes at June 30th were unsold, of which 500 were complete.

At June 30th, our home building lot position consisted of approximately 517,000 lots, of which 24% were owned, and 76% were controlled through purchase contracts. 25% of our total owned lots are finished and at least 44% of our control lots are or will be finished when we purchase them. Our growing and capital-efficient lot portfolio is key to our strong competitive position and also supports our efforts to increase our production volume to meet homebuyer demand. Our third quarter homebuilding investments in lots, land in development totaled $1.8 billion, of which $910 million was for finished lots; $540 million was for land development, and $350 million was to acquire land. $300 million of our total lot purchases in the third quarter were from Forestar. Forestar, our majority-owned subsidiary, is a publicly traded well-capitalized residential lot manufacturer operating in 55 markets across 22 states. Forestar is delivering on its high growth expectations and now expects to grow its fiscal 2021 lot deliveries by approximately 50% year-over-year to a range of 15,500 to 16,000 lots, with a pretax profit margin of 11.5% to 12%, excluding their $18.1 million loss on extinguishment of debt recognized during the quarter. At June 30th, Forestar's owned and controlled lot position increased 91% from a year ago to 96,600 lots; 61% of Forestar's owned lots are under contract with D.R. Horton and are subject to a right of first offer and our master supply agreement. Forestar's separately capitalized from D.R. Horton and had approximately $470 million of liquidity at quarter end with a net debt to capital ratio of 37.8%. With a strong lot supply, capitalization and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.

Financial Services pretax income in the third quarter was $70.3 million, with a pretax profit margin of 37.3% compared to $68.8 million and 43.9% in the prior year quarter. The year-over-year decline in our financial services pretax profit margin was primarily due to lower net gains on loans originated this quarter caused by market fluctuations and increased competitive pricing pressure in the market. For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 66% of our homebuyers. FHA and VA loans accounted for 45% of the mortgage companies' volume. Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 721 and an average loan to value ratio of 89%. First time homebuyers represented 58% of the closings handled by the mortgage company this quarter.

At June 30th, our multifamily rental operations had 11 projects under active construction and an additional four projects that are completed and in a lease up phase, based on leased occupancy and our marketing process. We expect to sell two or three of these projects during the fourth quarter of fiscal 2021. Our multifamily rental assets sold for $458.3 million at June 30. Last year, we began constructing and leasing homes as income-producing single family rental communities. After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is marketed for sale. During the third quarter, we sold our second single family rental community for $23.1 million in revenue, and $11.4 million of gross profit. At June 30, our homebuilding inventory included $303.1 million of assets related to 44 single family rental communities, compared to $87.2 million of assets related to 10 communities at the beginning of the fiscal year. We are pleased with the performance of our single and multifamily rental teams, and we look forward to the growing contributions for our future profits and returns.

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the nine months into June, our cash provided by homebuilding operations was $276 million, even while we have reinvested significant operating capital to expand our homebuilding inventories in response to strong demand. At June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.7 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. We believe this level of homebuilding cash and liquidity is appropriate to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions. Our homebuilding leverage was 16% at the end of June, with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months. At June 30, our stockholders' equity was $13.8 billion, and book value per share was $38.54, up 27% from a year ago. For the trailing 12 months into June, our return on equity was 29.5% compared to 19.9% a year ago. During the quarter, we paid cash dividends of $72.1 million and our board has declared a quarterly dividend at the same level as last quarter to be paid in August. We repurchased 2.6 million shares of common stock for $241.2 million during the quarter for a total of 8.1 million shares repurchased fiscal year-to-date for $661.4 million. Our remaining share repurchase authorization as of June 30 was $758.8 million. We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.

In the fourth quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $7.9 billion to $8.4 billion and our homes closed to be in the range between 23,000 and 24,500 homes. We expect our home sales gross margin in the fourth quarter to be in the range of 26% to 26.3% and homebuilding SG&A as a percentage of revenues in the fourth quarter to be approximately 7%. We anticipate our financial services pretax profit margin in the range of 40% to 45%. And we expect our income tax rate to be approximately 23.5%. For the full fiscal year of 2021, we now expect consolidated revenues of $27.6 billion to $28.1 billion and to close between 83,000 and 84,500 homes. This year, we have prioritized reinvestment of our operating capital to increase our housing and land and lot inventories to support higher demand. Our other cash flow priorities remain balanced among increasing our investment in our multi and single-family rental platforms, maintaining conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to reduce our outstanding share count by approximately 2% from the beginning of fiscal 2021.

In closing, our results reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands. Our results also illustrate the growth opportunity in front of us as we increase production capacity in response to homebuyer demand. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to capitalize on today's robust market and to operate effectively in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your focus and hard work. As a result of these efforts, we are incredibly well positioned to continue growing and improving our operations. This concludes our prepared remarks. We will now host questions.

Yes, thanks very much guys, impressive results. And really interesting times here, I wanted to talk a little bit about this restriction of sales which we've been seeing you and others do. Throughout the June quarter, you indicated you expected that to continue in the September quarter. I was wondering if you could provide a little bit more color around that. Are you expecting the restrictions to be similar in severity in the September quarter? Do you think those restrictions might continue past September to a meaningful degree? And I guess it's really related to your starts. And so in that regard, your starts were down I think 5% sequentially or so was curious when you thought that could grow. And you talked about building the infrastructure needed to do higher level of housing starts, I wondered to see if you could provide a little more color around that. So more color on the starts outlook. And are you going to be continuing to restrict sales at the same degree in September, and maybe past September?

Well, on the starts outlook, we have a plan. And our plan is to consistently be out there community by community, increasing production over time. If you look at our quarterly run rate, we're in that 20,000 to 23,000 starts each quarter. That was the plan for this year. Our plan is to take that out next year. And we position land, lots and people to affect that plan. So demand out there is just unlike anything I've ever seen. And I think our focus is on how to meet that demand in the most efficient manner. Injecting a homeowner into the process sooner rather than later impacts our ability to get the house built in that extended time and it makes it harder for our trades and our superintendents, as I can tell you through our history, to have somebody walk into our models and to tell them we don't have a house for you to buy today is something that is foreign to us and as difficult as anything I've ever seen on salespeople. It is a tough environment to be in a sales office today. And I talk, in our travels, to our people that we are going to provide a home for everybody walking in. We just need to keep on being patient and understand their frustration. But that's just again; it's a market I've never seen. Demand is just unbelievable today. I can't remember the rest of the question.

Will the current restrictions continue with the same intensity in the September quarter, and do you expect them to extend beyond September?

We are continuing to put things in place to expand our production capability. We've increased the pay size of our lot deliveries, because we see that in my history, if a buyer walked into a model, and you hadn't figured out how to get them under contract, within a week to 10 days, they had bought somewhere else. I got an email this month, from a buyer who has been in our models at every release for the last year and hasn't been able to buy a house. And he's still waiting. I mean, you can multiply that a thousand times across the country, with multiple builders out there. We did not restrict sales, as soon as the general market did, which just geometrically increased our demand. And it's just again, we're all managing through a market that none of us have ever seen. And probably the difference in this cycle than the prior super demand cycle that I was a part of, is the builders are disciplined this cycle. We're all focused on capital efficiency; we're all focused on improving returns. And it's, I think it's going to expand the cycle again. And again, we're in unchartered waters from a demand aspect right now.

And Steve, in terms of just specifically restricting sales, those decisions are going to continue to be made on a community by community basis. So where we can get the starts accelerated is where we'll open up for more sales more quickly.

Where we can get the starts accelerated as well as getting better certainty to production timelines. The worst thing we want to do is put a homeowner homebuyer into the backlog and then not be able to deliver our commitment to them as to when their home's going to be ready. It's very disruptive. We want them to have a great experience and be very happy with their house when they move into it. So as we've worked through a lot of the supply chain disruptions, we've adopted some of our processes, sharing more information earlier in the process with our trade partners, helping us with longer lead times, that's helping to work through some of the supply chain issues. We're hopeful that those things are resolving as we work them through but for the fourth quarter, I can foresee us continuing to restrict sales, again, the decision made community by community based upon current local conditions. But those restrictions will likely remain in place in the fourth quarter.

Okay, appreciate that. Your order ASP was remarkably up about 10% sequentially from the March quarter, I was wondering how much of that increase in order ASP was actual price, do you think versus mix shift? And as you look in at that order, ASP flowing into your gross margin in the next quarter or two? I was curious if you could help us understand what kind of lumber cost cadence we should be thinking about. Obviously, it's gyrated quite a bit here over the year past year so if you could give us a sense for was this quarter absorbing peak lumber cost? Or is it next quarter just help us understand how the lumber cost cadence fits in as well as the mix shift effect in your order ASP.

Steve, I'll take that. The lumber cost. I don't think we saw peak lumber costs coming through in our June quarter closings. I'm expecting to your word gyrating was a good word for the lumber market, seeing the higher lumber costs coming through in our September quarter deliveries and early into our fourth quarter deliveries and I'm very confident that the order price trends that we've seen have more than offset that lumber cost. And we've been able to absorb that well, into margins that we'll see in our fourth quarter deliveries.

Yes, and in terms of mix, Steve, I mean, our sales orders are a good indicator of our forward closing price. But it doesn't typically flow through directly like that. So we wouldn't expect our closing price next quarter to be at the same magnitude or equivalent to our sales orders. But we haven't seen a whole lot of mix. So I mean, we are seeing and you can see it flowing through on our closings in our gross margin, a lot of like for like price improvement.

Thanks, good morning, everybody. In the release, you've mentioned that you're building out infrastructure to support the higher level of housing starts going forward. And can you expand on that a little bit, David? So are there incremental costs? What specifically are you referring to there? And when is your expectation that such infrastructure will be in place to support those starts level? And I guess really, what I'm asking is, how much of this is really in your control, versus the demand side of supply chain side that isn't?

I think what we can control, we are controlling, Carl, we can control the number of lots that we push into the pace; we can control communication with our trade partners and make sure they understand the levels and timing of what we're pushing out. In our staffing levels generally that's been the least of the problems because it's absorption for community. So you have to add support and communities. But it's just a very efficient process. So it really just has to do with field operations, as far as driving that capacity and aggregating and consolidating trade base within those sub markets, which is a process that we go through every day. I mean, we did start almost 95,000 homes, in trailing 12 months. And that's I don't think anybody else has ever done that. And it's a result of scale and just incredibly hard work being done out in the field.

Thanks, David. In the past, and during this cycle as well, we've noticed builders using sales prices to curb turnover rates. I share some concerns about the market, particularly that this pricing dynamic might start to negatively affect sales rates. I'm interested to know if you've observed this, especially since you mentioned a lot of positive things about demand. Are the restrictions on sales now more crucial for managing absorption pace than pricing? I understand that these decisions are made at a local level. Could you clarify whether you're primarily using pricing to cover costs because demand is strong, or do you still think pricing serves as a way to slow down sales?

I think today we're seeing very little price pushback. I don't know that you could ever know that you could impact demand the price today. So, go ahead.

Our restriction on sales is not being driven by and large by, just let's just increase pricing until people stop buying. We are not releasing homes for sale until we're through a certain stage in the production process, which varies by community. But it's not just using price to adjust the pace that we're going. We're actually not releasing the homes for sale. When the homes do get released for sale, we're seeing very quick absorption of those particular homes by buyers that are waiting to buy homes and to go under contract and then take delivery of the homes.

Still very focused on affordability, Carl, even with increases in our ASP is still significantly lower than the rest of the public builders by and large. And that's a focus that we don't want to lose. We do want to maintain affordability and we've seen the credit profile of our buyers continue to keep pace with where ASPs have gone and so really even when we do stress tests on our backlog, it looks like our buyers are in very good shape even in spite of the price increases we've seen in the market.

Hi, good morning everyone. Thank you for taking my question. Can you discuss the early outlook on pricing and margins for 2022? It seems like you could benefit from your projected double-digit revenue growth. Hopefully, commodity prices may stabilize in 2022. Given that all the builders are managing their sales, this allows some time for the supply chain to improve, and you might not need to pass on all those benefits. Should we expect flat to slightly increased gross margins, or will there still be pressure on gross margins due to a challenging comparison with 2021?

Sure, thanks. Thanks, Deepak. We have commented and guided to a slightly off gross margin into our Q4 and to our September quarter of 26% to 26.3%. And based on what we can see today in our backlog with the pricing that has already been taken in our sales orders over the last quarter or two, we believe we're in position certainly to maintain or slightly see increases in our gross margin over the next quarter or two in excess of the cost increases that we're seeing come through. So in the short run, the next quarter or two, we do expect stability or maybe a slight upside to our current gross margin. Obviously, beyond that, we don't have as much visibility, but clearly, we feel like we have good stability in our margins for the near term.

You mentioned some new or incremental supply chain constraints in the quarter. Can you elaborate on those? Additionally, are there any new issues that arose in the prior quarter? And have you noticed any easing of constraints as well?

So on the supply chain, if anything was construed as there were new constraints, I don't want to imply that there were any new constraints. I think we referenced last quarter that the supply chain challenges have been a bit of a whack-a-mole, and that one pops up and the teams jump on it, and work with the suppliers in that particular category to solve those issues. One of the things we have done is adjusted internally with a lot of our lead time, how far in advance of actual production start that we're communicating with the supply chain partners to make sure that product is available for us. But I could not point to any one particular item as new or incredibly acute right now. There's just a series of issues that we solve every day in the business. That's part of what we do. It's how we've delivered over 20,000 homes this last quarter.

Thanks. Good morning, everyone. I want to get a better sense a little bit of the approach to orders relative to production pace and supply constraints. And obviously a bit of discussion here already on the call. But what I'm a little confused on is you'd said that your starts pace is kind of tracking to plan at 22,000 to 23,000. You just said that. Also, there are no really new constraints out there, more ongoing supply constraints, yet your orders are down 17%. And that's in contrast to prior commentary of flat to down single digits. So just wanted to understand what really has been the difference in approach and if there's something that really changed during the quarter that's driving that different result on the order side, relative to your prior commentary?

Well, Mike, I think what we have seen is an elongation of our construction times beyond what we were seeing previously, which is really a cumulative effect of a number of things that have been ongoing that are impacting supply chain, which are manifesting themselves in longer construction times. And so as we're managing that and trying to manage the customer experience as best we can, that has resulted in us releasing sales in more communities later in the construction cycle than we were previously. So it's been, I would say, an incremental restriction of sales, that's resulted in probably a bit more of a sales order restriction than we would have anticipated a quarter ago. But it's something that's, as we work through the supply chain issues and start to have better visibility and get more of our production later in the construction cycle and essentially catch up a bit on production, we'll be able to probably resume at a better pace on sales orders.

Our goal means to have our customers in backlog for a shorter period of time, the time from when they sign the contract, to when we deliver the home. We're consciously trying to compress that timeframe, to give them more certainty in the process and give us more control of when we deliver the home to them.

When you move the release date on a particular house, from slab to frame to window install, I mean that is an extended period of time right now. And so reading demand, or any significant change in this quarter adjustment, as we have pushed out that release date, to me is just not indicative of what is out there in the market. We really are trying to improve the experience of the homebuyer. And when we give somebody a date to close, we intend to keep because their whole life revolves around them. And as the certainty close date was impacted by window insulation, anything and everything that appliances that was taking place through the last six months, it just became obvious to us that we need to be more restricted in what we've done. Trust me, it is soul crushing to our salespeople to have somebody walk out and ready, willing, able to buy. And we tell that we have houses that will become available in 30 to 45 days. And we'll be glad to call you. What is different to me this market cycle than any other that I've ever been a part of, is that 30 or 45 days later, you call that person and yes, they're still trying to buy a house. So it's a tough market environment.

I appreciate your comments, David. Not disappointing our customers is crucial. I want to revisit the order average selling price, which is around 360, up over 22% year-over-year, and the backlog, which is up over 13% year-over-year. This is quite different from the period between 2018 and 2020, when we experienced home price appreciation, but maintained an average closing price around 300 for three consecutive years. My question is, what steps are you planning to take moving forward? I recognize that your price might be lower than most competitors, yet the monthly payment has been a point of pride for you. Are there any actions you can take in the next year or two to potentially change this trend, whether it’s by building in different areas or offering more attached products? Additionally, considering the possibility of rising rates, do you have any strategies regarding your product mix or geographic focus that could address these concerns?

Well, we have decreased our square footage and you will probably continue to see that take place. We are reducing the number of two-storey homes that we offer in communities. I mean my offer I mean, we have a production model, we're detailing or we're picking the houses we're going to build and the lay schedule that we're going set up with the market with. So it again, we are very sensitive to price point; we are very sensitive to the FHA loan limits. That, to us, is a risk mitigator, because that's where the vast majority of buyers are. And if we service so, I trust my core, we're monitoring, and we're tracking it. And we do believe that as our production capabilities continue to improve and increase, and we consolidate labor and in these markets that we will continue to be able to offer affordable homes. If rates tick up and yes, more pressure on price. But we will meet that challenge when it comes.

Good Morning. Thank you for taking the questions. I guess not to belabor the point, but just back on the restricting of sales pace. Because it seems like it was effective to really similar degree consistently across your markets, despite these local community by community decisions. So can you sort of go over the mechanics, I guess, of how you all Horton management really communicates the strategy to, I believe you said earlier, these sort of frustrated individual operators and sales folks, what are you telling people to look for in terms of, like you said, homes and inventory and extended cycle times today versus ideally where you want them to be, in order to begin releasing those sales again, thank you.

I think what we're aiming for is to establish an inventory level that meets the needs of buyers. Typically, at this time of year, we expect to have specifications around 40%-45%, but currently, the only specifications available are for houses that we haven't put on the market. We are focused on improving efficiency in our process. By controlling when a house is sold, we can better meet customer expectations and reduce frustration for buyers. When a buyer is told they can move in June, they want to see that the house is ready, leading to them frequently checking on the progress of their home compared to others in the community. This creates unnecessary challenges that we currently want to avoid. If a buyer becomes frustrated during this process, it can take a long time for those feelings to dissipate, making it hard to manage their expectations afterward. By delaying the introduction of buyers until the inventory is further along in its readiness, we aim to alleviate some of the pressure on our trades and builders. This strategy began in January in some divisions, expanded to others in February, and by April and May, it was prominent in several of our larger divisions in Texas. We found ourselves spending excessive time addressing customer frustrations regarding the delayed status of their homes, which was taking away from other important tasks that could enhance our overall efficiency and production capabilities.

No, that's really helpful color there. And it's actually segue into my follow up, which is when you talk about how strong demand is, and exceeding your current capacity, and you're clear around your own restrictions. What are you looking at in your communities that quantifiably, I guess that gives you the confidence to say that, and in fairness when you look at the, I guess traffic, perhaps in your communities, are you also seeing traffic slip more than you might expect, seasonally? And was that part of the shortfall in orders? Or is it really just simply what you previously said that demand is just far exceeding capacity.

Matt, we can look across and see the stage of construction our unsold homes are at, and by and large, they are at early stages of construction and likely not available or released for sale. So and we're not writing sales contracts, by and large for pre sales, breathing, we haven't started yet and generally reaching a more mature stage of construction. So we can deliver with certainty a closing date to that buyer at the time we signed the contract with them.

And so many of our communities have wait lists or interest lists that far exceed even what we have under construction, which is why you continue to hear us answer every single question so far, that the demand is still there. And the demand is extremely robust. And this was an internal decision that was based on our production capacity and taking care of our homeowners and homebuyers.

Hey, guys, good morning. Thanks for taking my call. So first question, Jessica, you made a comment earlier that I'd love to drill in on a little bit in regards to the credit profile of your buyers, I think obviously a lot of questions on the home price increases and what impact that could have on affordability, you said you've seen the credit profile of your buyers keeping pace with the home price increases you've instituted up to this point, which I was a little surprised at just given the fact we know incomes are not up 20% year-over-year, and rates are pretty stable now after obviously going down quite a bit in the second half of last year. So should I interpret that to imply that maybe the mix of your buyers or the buyers in your interest list are kind of slowly shifting maybe towards more of a move up buyer or at least a more affluent first-time buyer than you've historically seen over the last few years.

We haven't observed any changes in the mix of our brands, which is a key indicator for entry-level versus move-up buyers. Even when examining the credit profiles across our brands, we've seen an improvement in FICO scores this year, along with a slight decrease in debt-to-income ratios, despite higher average loan amounts due to the increased average sales prices. Therefore, I wouldn't attribute it to that. Currently, about 55% to 60% of our buyers are first-time buyers.

A very large number of unsatisfied buyers out there, people that want to buy a home that have not been able to buy a home because they could not get a home. And we look at the existing home inventory levels that are available and given marketplaces. They're just not there. And so the quick moving homes, the specs we had that were completed last year, obviously they were absorbed very quickly into the marketplace. We've restricted the sale of a lot of our homes, to give better certainty to that homebuyer in the process of their delivery date. And with in a rising price environment when we're restricting the sale, they were able to price to market at the time we signed the contract, which is then closer to the delivery date.

Good morning. Last year, the pandemic kind of threw seasonality out the window, as you look at home buyer behavior in terms of underlying demand. Are you seeing any return of seasonality? Or should we expect another year of people looking to buy homes the week of Thanksgiving, the week of Christmas? And then your cancellation rate, I think extremely low by historical standards. But I think it ticked up very modestly sequentially in the quarter. Was there anything behind that? It sounds like price wasn't an issue. But just wondering if there was anything you saw there that just kind of noise?

There is nothing to mention regarding the cancellation rate, which remains at a historic low. We are typically comfortable with ranges in the low 20s, compared to the 17 we discussed today, so there's nothing significant to report there. Regarding the first question about seasonality, yes, we do see that.

I’m not entirely sure how you define seasonality based on the number of houses you start and the timing of their release for sale. We are developing a process to enhance that, and I believe you will see our sales align with our inventory of releases as we put more houses on the market.

And sales historically has been a very good indicator of demand in the marketplace, as we've had a broad range of homes in various production stages available for sale and pre sales available. And that would be a good indicator of demand in the marketplace. Today, our supply of homes is indicating what we're going to be able to sell and deliver. And with almost 50,000 homes in production and the starts we've had over the past 12 months. We're in a great place to continue to deliver double-digit growth in our deliveries. We feel really good about fiscal '22.

Hey, good morning, everyone. Thanks for taking my questions. So first question on you alluded in your press release about double-digit unit growth in 2022. And my question doesn't really pertain to demand or the demand outlook, really, but I'm just hoping to understand, what are some of the biggest risks to achieving that growth on the supply side? We've heard issues with lot development availability, community approvals, material shortages, a little bit of labor issues. I'm just hoping that you can explain some of these risks that might impede that double-digit growth, and how some of those constraints you see playing out into '22.

Truman, it really is a little bit of everything you mentioned, but it's nothing new. It's all things, as Mike said earlier on we've been working through this entire time. So if we didn't feel confident in the double-digit and the ability to continue to manage through those and ramp up our production to more adequately meet the demand that's in the market, we wouldn't be saying that here in July. But there are constraints. And we wouldn't say any one thing, it's everything you outlined. And it varies by market, essentially, on a daily basis, what the constraint is, but our operators are doing a fantastic job of navigating through that.

But the positioning, we can see in our inventory, our inventory did increase by about 1,000 units this quarter, up 44% year-over-year, on a trailing 12 months basis, we've started 94,500 homes, that in and of itself is double-digit growth over what our plan deliveries are this year. So we're already in position to deliver double-digit, and working to improve on that and expand on that as we move into '22. We feel like we're in great position to do that. There'll be challenges. There'll be unknown challenges that we haven't dealt with yet. But we're confident in our teams and our ability to continue to maintain the current pace and incrementally improve on it as we move into '22 on our starts.

And I know that's a relatively high-level comment today. We're sitting in July; we haven't finished our fiscal year. So we would expect in November to give more specific guidance, in addition to just the double-digit closing target.

Okay. Really, what I'm kind of looking at is on the material side; we've heard of shortages kind of across the board, but especially windows, doors, concrete, I mean, it depends which market, right? But do you actually have contracts in place, with your suppliers to actually get that level of product?

We have relationships with our suppliers. I mean, no matter what the contract says, you're going to get what they're going to give you and they're going to deliver who they want to deliver to. And so we work very hard to be a good trade partner with our suppliers in both materials and labor, and making sure they understand what our production plans are. And our commitment is to them. And they've made the commitment to us.

Again, it goes back to scale within these markets. I mean, we're a very important customer to do just about every material supplier in those markets. So Mike's right, it is about relationships, but it's about future relationships, as well. So is it going to be a difficult path? Yes, it is going to be difficult because they're saying no to somebody; we just don't want them to be saying no to us.

Understood. And then my follow up question just a follow up very strong order ASP up 10%, quarter-over-quarter. We've just seen a lot of builders starting to employ a final and best bidding process. Just hoping to understand either what portion of your communities or the portion of that price came from the bidding process. And then on the other side of it just with affordability there's been some talk, some believe in the industry that there's been some incentives taking up. Have you seen that in any of your local markets?

Certainly haven't seen any incentives ticking up. And we have used the fund to invest in certain communities and where we have a very limited lot supply. But that's not a giant component of what we're seeing on sales price or margin. Certainly, it's impactful, and it's certainly happening in our extended longer communities, especially at the price points we have, we're offering in the entry level we don't like that. I personally don't like that process, because in '05, '06 there was a false demand by people running around putting houses under contract, because they never intended to close. I don't want our operators to have a false expectation about the pricing that's achievable in the market, by having a guy from California bid on my house and stuff work on again Texas, and then all of a sudden, every house is worth what a guy transferring in from California is willing to pay. We're trying to stay very close to these markets. And our goal is to sell to everybody who walks into our house and into our model for home. And we're not there right now, but we're certainly going to get there.

Good morning, everybody. And don't pick on the California folks there.

We're making a lot of money in California right now.

You can make more there. All the stocks reporting today show record margins, record demand, and limited supply. What's different this cycle is that we have very low interest rates and the impact of COVID. There’s also high consumer credit and governments are printing a lot of money. In housing, there’s a significant presence of institutional buyers, coming from builders and other large entities, purchasing sizable portfolios regularly. I believe you have an excellent business model and are addressing your land supply. However, as an operator, your working inventory appears less capitalized than historically. Your leverage is very low. What are you focusing on to determine when you might see changes? It seems like you’re currently earning above average, and there’s nothing indicating your margins will decline; in fact, they are increasing. How are you assessing the market, particularly regarding competition for properties from institutional investors, as the cap rates remain favorable? Are there additional macro factors influencing your strategy, beyond operations? Thank you.

I think from looking at what macro storm clouds might be the things that might happen in the next six months or a year that we never anticipated, like a worldwide pandemic that we didn't anticipate two years ago. There are certainly things like that that can happen that could impact the business. Rising interest rates always are a significant cost input into the value of the homes and the monthly payment. And we monitor obviously that very closely and looking at affordability. I think Jessica touched on it before with two points in the stress testing we did the backlog, that the backlog can withstand some interest rate upward movement right now. In addition, the DTI, the debt-to-income levels we're seeing in our borrowers this most recent quarter, actually taking down a little bit despite the average loan size going up. So the credit qualities of our buyers are good. Looking at our for sale communities, the vast majority of the buyers of those homes are owner-occupied homes. We don't have any institutional relational outtake programs and out for sale communities. Our institutional focus would be on the build direct communities which are separate and apart from the for sale side of our business. It's hard to know all the things that may change in the future, Ken. But one thing we do focus on and have focused on for many years is maintaining a very strong, flexible balance sheet, as you said, where we have great low leverage, strong equity capitalization, and very good liquidity that allows us to take advantage of the market conditions as they change and continue to consolidate market share, especially at a local level where we can turn that local market share leverage into outperformance.

Thank you, Darrell. We appreciate everybody's time on the call today. And look forward to speaking with you again to share our fourth-quarter and full-year results in November. Under the D.R. Horton family, Don Horton and the entire executive team, thank you for your focus and hard work. Tremendous accomplishments in delivering the first three quarters. Let's go finish strong and put numbers on the board that nobody's ever seen. Thank you.