D.R. Horton Inc (DHI) — Q4 2021 Earnings Call Transcript

Thank you, Tom, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2021 financial results. Before we get started, today's call includes 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 factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and subsequent reports on Form 10-Q, all of which are or will be filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com and we plan to file our 10-K towards the end of next week. As referenced in our press release, we realigned the aggregation of our home-building operating segments into 6 new reportable segments this quarter to better allocate our home-building operating segments across our geographic reporting regions. As a result, in addition to our standard updated investor and supplementary data presentations, we will also be posting to our Investor Relations site, 3 years of quarterly sales, closings, backlog, homes, and lock data that conforms to our new geographic region presentation. All of this can be found at investor.drhorton.com 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 am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Co-Chief Operating Officer, and Bill Wheat, our Executive Vice President and Chief Financial Officer. Today, we also have Paul Romanowski with us, who was recently promoted to Executive Vice President and Co-Chief Operating Officer. Paul has been with D.R. Horton since 1999 serving as our Florida South Division President for 15 years, and most recently, as our Florida Region President for 7 years. I'd like to take a brief moment to have Paul introduce himself before we get started, Paul.

Thank you, David. And hello, everyone. I'm excited for the opportunity to serve in my new role on the D.R. Horton management team, and I look forward to getting to know our investors and analysts in the coming year.

Thank you, Paul. Given that Paul is new to his role, he will not be an active participant today, but we are glad to have him with us and believe his extensive home building experience will strengthen our executive team. The D.R. Horton team finished the year with a strong fourth quarter, which included a 63% increase in consolidated pre-tax income to $1.7 billion and a 27% increase in revenue to $8.1 billion. Our pre-tax profit margin for the quarter improved 480 basis points to 21.3%, and our earnings per diluted share increased 65% to $3.70. For the year, consolidated pre-tax income increased 80% to $5.4 billion on a $27.8 billion of revenue. Our pre-tax profit margin for the year improved 460 basis points to 19.3%, and our earnings per diluted share increased 78% to $11.41. We closed a record 81,965 homes this year, an increase of over 16,500 homes or 25% from last year, while also achieving a historical low home building SG&A percentage of 7.3%. Our home building return on inventory was 37.9%, and our return on equity was 31.6%; these results reflect our experienced teams in their production capabilities. 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. Our home-building cash flow from operations for 2021 was $1.2 billion. Over the past 5 years, we have generated $5.9 billion of cash flow from homebuilding operations while growing our consolidated revenues by 128% and our earnings per share by 383%. During this time, we also more than doubled our book value per share, reduced our homebuilding leverage by 220%, and increased our homebuilding liquidity by $2.8 billion, all while significantly increasing our returns on inventory and equity. Market conditions remain very robust, and we are focused on maximizing returns and increasing our market share further. However, there are still significant challenges in the supply chain, including shortages in certain building materials and tightness in the labor market. As a result, we continued restricting our home sales base during the fourth quarter by selling homes later in the construction cycle to align with our production levels and better ensure the certainty of home closing date for our homebuyers. We expect to overcome the supply chain challenges and ultimately increase our production capacity. After starting construction on 22,400 homes this quarter, our homes in inventory increased 26% from a year ago to 47,800 homes at September 30th, 2021. In October, we started more than 8,000 homes, further positioning us 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 homebuilding operations and managing our product offerings, incentives, home pricing, sales pace, and inventory levels to optimize our returns.

Diluted earnings per share for the fourth quarter of fiscal 2021 increased 65% to $3.70 per share, and for the year, diluted earnings per share increased 78% to $11.41. Net income for the quarter increased 62% to $1.3 billion and for the year, net income increased 76% to $4.2 billion. Our fourth quarter home sales revenues increased 24% to $7.6 billion on 21,937 homes closed, up from $6.1 billion on 20,248 homes closed in the prior year. Our average closing price for the quarter was $346,100, up 14% from last year. And the average size of our homes closed was down 1%.

Net sales orders in the fourth quarter decreased 33% to 15,949 homes, and the value of those orders was $6 billion, down 17% from $7.3 billion in the prior year. A year ago, our fourth quarter net sales orders were up 81% due to the surge in housing demand during the first year of the pandemic when we had significantly more completed homes available to sell and prior to the supply chain challenges that arose in 2021. Our average number of active selling communities decreased 5% from the prior year and was down 3% sequentially. Our average sales price on net sales orders in the fourth quarter was $378,300, up 23% from the prior year. The cancellation rate for the fourth quarter was 19%, flat with the prior-year quarter. As David described, new home demand remains very strong, and our local teams are continuing to restrict our sales order pace where necessary on a community-by-community basis based on the number of homes in inventory, construction times, production capacity, and lock position. They also continue to adjust sales prices to the market while staying focused on providing value to our buyers. We are still restricting the pace of our sales orders during our first fiscal quarter, but to a lesser extent than during our fourth quarter. As a result, we expect our first quarter net sales orders to be approximately equal to or slightly higher than our 20,418 sales orders in the first quarter last year. Our October net sales order volume was in line with our plans, and we remain confident that we are well-positioned to deliver double-digit volume growth in fiscal 2022 with 26,200 homes in backlog, 47,000 homes in inventory, a robust lot supply, and strong trade and supplier relationships.

Our gross profit margin on home sales revenue in the fourth quarter was 26.9%, up 100 basis points sequentially from the June quarter. The increase in our gross margin from June to September reflects the broad strength of the housing market and benefited from the better alignment of our sales order pace to our construction schedules. 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 7% sequentially, while our stick-and-brick cost per square foot increased 7.5%, and our lot cost increased 2%. We expect both our construction and lot costs to continue to increase. However, with the strength of today's market conditions, we expect to offset any cost pressures with price increases. We currently expect our home-sales gross margin in the first quarter to be similar to the fourth 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 fourth quarter, homebuilding SG&A expense, as a percentage of revenues was 6.9%, down 70 basis points from 7.6% in the prior year quarter. For the year, homebuilding SG&A expense was 7.3%, down 80 basis points from 8.1% in 2020. Our homebuilding SG&A expense, as a percentage of revenues, is at its lowest point for a quarter and for a year in our history. And we are focused on continuing to control 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 are focused on expanding our production capabilities further. We started 22,400 homes during the fourth quarter and 91,500 homes during fiscal 2021, which is an increase of 21% compared to fiscal 2020. We ended the year with 47,800 homes in inventory, up 26% from a year ago. 21,700 of our total homes at September 30th were unsold, of which 900 were completed. Although we have not seen significant improvement in the supply chain yet, we expect the current constraints to ultimately moderate at some point in 2022.

At September 30th, our homebuilding lot position consisted of approximately 530,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. 24% 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 capital-efficient lot portfolio is key to our strong competitive position and will support our efforts to increase our production volume to meet home-buyer demand. Our fourth quarter home-building investments in lot, land, and development totaled $1.8 billion, of which $1 billion was for finished lots, $330 million was for land, and $440 million was for land development.

Forestar, our majority-owned subsidiary, is a publicly traded, well-capitalized residential lot manufacturer, operating in 56 markets across 23 states. Forestar continues to execute extremely well on its high-growth plan, as they increase their lots sold by 53% to 15,915 lots during fiscal 2021 compared to the prior year. Forestar's pre-tax profit margin for the year improved 400 basis points to 12.4%, excluding an $18.1 million loss on extinguishment of debt. At September 30th, Forestar's owned and controlled lot position increased 60% from a year ago to 97,000 lots. 61% of Forestar's owned lots are under contract with D.R. Horton or subject to a right of first offer, under our master supply agreement. $370 million of D.R. Horton's land and lot purchases in the fourth quarter were from Forestar. Forestar is separately capitalized from D.R. Horton and had approximately $500 million of liquidity at year-end with a net debt-to-capital ratio of 35.2%. With its current capitalization, strong lot supply, and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.

Financial services pre-tax income in the fourth quarter was $103 million on $223 million of revenues, with a pre-tax profit margin at 46.1%. For the year, financial services pre-tax income was $365 million on $824 million of revenues representing a 44.3% free tax profit margin. 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 company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 722 and an average loan-to-value ratio of 89%. First-time home buyers represented 59% of the closings handled by our mortgage company this quarter.

Our multi-family and single-family rental operations generated combined pre-tax income of $74.3 million in the fourth quarter and $86.5 million in fiscal 2021. Our total rental property inventory at September 30th was $841 million compared to $316 million a year ago. We sold 3 multi-family properties totaling 960 units during fiscal 2021 for $191.9 million, all of which were sold in the fourth quarter, compared to 2 properties totaling 540 units sold in fiscal 2020. We sold 3 single-family rental communities totaling 260 homes during fiscal 2021 for $75.9 million, including one sale of 64 homes during the fourth quarter for $21 million in revenue. In fiscal 2022, we expect our rental operations to generate more than $700 million in revenues from rental property sales. We also expect to grow the total inventory investment in our rental platforms by more than $1 billion in fiscal 2022 based on our current rental projects in development and our significant pipeline of future single and multi-family rental projects. We are positioning our rental operations to be a significant contributor to our revenues, profits, and returns in future years.

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. During fiscal 2021, our cash provided by homebuilding operations was $1.2 billion, and our cumulative cash generated from homebuilding operations for the past 5 years was $5.9 billion. At September 30th, we had $5 billion of homebuilding liquidity, consisting of $3 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. This level of liquidity provides significant flexibility to adjust to changing market conditions. Our home building leverage was 17.8% at fiscal year-end, with $3.1 billion of home-building public notes outstanding, of which $350 million matures in the next 12 months. At September 30th, our stockholders' equity was $14.9 billion, and book value per share was $41.81, up 29% from a year ago. For the year, our return on equity was 31.6%, an improvement of 950 basis points from 22.1% a year ago. During the quarter, we paid cash dividends of $71.6 million for a total of $289.3 million of dividends paid during the year. During the quarter, we repurchased 2.3 million shares of common stock for $212.6 million. And our stock repurchases during fiscal year 2021 totaled 10.4 million shares for $874 million. Our outstanding share count is down 2% from a year ago, and our remaining share repurchase authorization at September 30th was $546.2 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. Based on our financial position and outlook for fiscal 2020, our Board of Directors increased our quarterly cash dividend by 13% to $22.5 per share.

As we look forward to the first quarter of fiscal 2022, we are expecting market conditions to remain similar with strong demand from home buyers, but continuing supply chain challenges that will delay home constructions, completions, and closings. We expect to generate consolidated revenues in our December quarter of $6.5 billion to $6.8 billion and our homes closed by our homebuilding operations to be in a range between 17,500 and 18,500 homes. We expect our home sales gross margin in the first quarter to be 26.8% to 27% and homebuilding SG&A as a percentage of revenues in the first quarter to be approximately 8%. We anticipate a financial services pre-tax profit margin in the range of 30% to 35%, and we expect our income tax rate to be approximately 24% in the first quarter. Looking further out, we currently expect to generate consolidated revenues for the full fiscal year of 2022 of $32.5 to $33.5 billion and to close between 90,000 and 92,000 homes. We forecast an income tax rate for fiscal 2022 of approximately 24%, subject to changes in potential future legislation that could increase the federal corporate tax rate. We also expect that our share repurchases will reduce our outstanding share count by approximately 2% at the end of fiscal 2022 compared to the end of fiscal 2021. We expect to generate positive cash flow from our homebuilding operations in fiscal 2022 after our investments in homebuilding inventories to support double-digit growth. We will then balance our cash flow utilization priorities among increasing the investment in our rental operation, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend, and consistently repurchasing shares.

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 strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the Company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your focus and hard work. Your efforts during 2021 were remarkable. We closed the most homes in a year in our Company's history, achieving 10% market share with record profits and returns. And we are incredibly well-positioned to continue growing and improving our operations in 2022. This concludes our prepared remarks. We will now host questions.

Thanks. Morning, everybody. Welcome, Paul. Thanks for taking my question. I wanted to ask about your internal plans for 2022 for orders, and perhaps talk a little bit about what you see your community count doing relative to your absorptions in which you lean on more for growth in the next fiscal year.

Regarding our sales absorptions and community count, we still believe that our community count remains stable, showing low single-digit growth. Our sales numbers are promising; if we aim to deliver between 90,000 to 92,000 homes, we must ensure our sales pace aligns with that goal. A critical factor for us is knowing when a home sale will close and be delivered. As we move into 2022, I anticipate stabilization in material availability first, followed by labor. We have been focusing on expanding our labor pool for the past decade. The steady rate of starts has allowed us to enhance our efficiency, enabling us to deliver more homes, and we plan to maintain this trajectory.

And really rather than a focus on community count, it adds inflows quarter-to-quarter. If we start a house, we're going to ultimately sell and close it. So, we really focused on our homes and inventory, and our lot position.

Sure. Thanks, Jessica. Thanks, David.

Both of which are in very, very good shape right now.

Yeah, okay. I appreciate that. Thank you. And then David, I wanted to go back to something that D.R. Horton has talked about in the past, that we don't hear too much from others is this idea of getting your cash out of land investments within 24 months of when you put it in, and I'm curious really on two fronts. One, the significant shift to options has probably allowed that to improve. But on the other hand, the delays in entitlement and approval processes and finding dirt has probably hurt that. So can you talk about that goal of getting your cash out of your land investments within 24 months and how you see that changing over time? And thanks a lot.

I would describe it as a requirement rather than a goal. This approach was established after the downturn, and we have remained committed to it. It's probably the most challenging underwriting obstacle our divisions face. However, it's a mandatory program because we've experienced the negative effects of holding long positions on land, which can impact your financial stability and introduce risks associated with unexpected future events. The 24-month cash-back strategy remains integral to every deal we assess and has significantly influenced our option lot position. We need to identify partners and manage the lots we wish to control, so establishing strong partnerships with these trends has been crucial throughout this cycle. A key aspect of this is the strict underwriting requirement to recover your cash within 24 months.

Carl, regarding your point about delays, this is relevant when we own our land and are self-developing. It doesn't significantly impact our cash return when we work with third parties and purchase lots, as we acquire the lots only when we're prepared to start building homes and have the necessary approvals. Recently, our cash return within a 24-month period has been affected by extended construction times due to supply chain issues. We've noticed that construction times have become longer. Year over year, our closings this quarter experienced construction delays of about 7 weeks, which is longer than we reported last quarter, contributing to some challenges with our inventory turns. However, we hope that as material supply stabilizes over the coming year, the situation will improve, allowing us to streamline our processes again.

Thank you, Bill. And thanks, everybody. I really appreciate the answers.

Thanks, Carl.

Thanks, Carl.

Okay, thanks very much. Thanks guys for all the info. I guess my first question relates to your company's comments about affordability. I guess first, am I right to think that you're driving affordability primarily through construction into design efficiencies? Or should we think that this operation is going to imply a lower gross margin? All things held constant? And then, regulated to your margin, I imagine you got peak lumber coming through your December quarter. So if lumber stays where it is right now, would it be reasonable to think that the December quarter margins might be the low point for the fiscal '22 year?

Well, in terms of lumber cost, that they are still rising. They rose further in our fiscal Q4. We've seen them rise further into October, so we do believe that we are seeing the peak of lumber cost. However, other costs are increasing as well; we're seeing costs really increasing across-the-board, so even when we see perhaps some relief from lumber as we move further into fiscal 2022, I think that will be offset by other cost increases. As far as the net effect on gross margin, ultimately that will depend on the strength of the demand environment as we move into the spring season and our ability to continue to offset costs with prices. Right now, our short-term view is that we should be able to offset costs with price and maintain our margins that are around the level that we just reported in the fourth quarter. But truly as we move through fiscal 2022, it will depend on the strength of the demand environment.

And our ability to continue to achieve affordability is really across a multitude of things. It's not any one thing we would point to. Clearly, our sides and our scale and the construction efficiencies that we've been very focused on, particularly in our Express Homes brand, limiting floor plans, limiting options, being able to control the trades at our job site all-day long, house to house to house, repetitively doing the same thing over and over and over again, has been a benefit in that regard. And then to a lesser extent, we have also continued to see our average square footage come down, and that's the way we can focus on affordability as well, is building more of our smaller floor plans.

Stephen, we're constantly trying to derive a more affordable total occupancy cost for our buyers, and that effort is never going to stop.

Right, and I think the gist of my question was that none of that implies necessarily a lower gross margin, all else held constant, right?

No, we are not seeing that.

All right. I wanted to clarify that point. Secondly, regarding sales restrictions, it’s encouraging to see the analysis of your starts and inventory. We agree that there has been a significant positive shift in your production metrics. I’d like to address your comments on sales restrictions, as someone listening might interpret the reduction in sales restrictions as a sign that demand has weakened, suggesting fewer people on waiting lists. Could you clarify whether these relaxing sales restrictions indicate slowing demand or increasing supply? Assuming demand isn’t weakening, I wanted to revisit your comments from March. I believe Jessica mentioned a stress test on your backlog that provided reassurance about affordability. Have you conducted that assessment recently?

That last question, yes, we did update the stress test and we look at that every quarter in our backlog and found no real change. In fact, maybe a slight improvement from the March quarter to what we saw in the September quarter backlog. In the sales restrictions, it's certainly a function of supply. We're seeing that we have been able to pull more homes to the production process to points, where we are able to give that buyer a more confident delivery date and give them a better experience in the process. I don't think that in any way, it's sales that have been reflective of the demand environment. We have consciously chosen not to push our sales contracts and take advantage of that demand until we can meet those customer expectations properly. So we've seen that our completed homes in inventory that are unsold are still below 1,000 homes. And that's scattered across the country, so it's not like we're seeing any pile up of available inventory. It's when we're releasing homes, we're able to sell those homes in the normal course of business.

As a reminder for those who may not have heard the stress test commentary last quarter and just to quantify that, the stress that we've done on our backlog is if interest rates were to rise 100 basis points, what that at-risk buyer would look like, and it's generally mid-to-high single-digit percentage of potential at-risk with a full 100 basis point move, and that's really just at-risk. We would not expect total fallout in that regard. We look to document additional income, look to put those buyers in additional different mortgage products than they are currently anticipating. We feel pretty comfortable still with the ability of our buyers from an affordability perspective.

Thanks for all the info, I appreciate it.

Hey. Good morning, everyone. Thanks for taking the question and congrats on the results here in a pretty tough environment. So on the order outlook, Bill, you spoke to the Q1 uptick, and I think suggesting basically a 28% higher sequentially versus Q4, which is certainly well above historical norms, and not surprising as you released those sales restrictions and the inventory homes are there. Does this atypical uptick get you back to equilibrium for lack of a better term? Or should we understand that just given your inventory position ahead of the spring that we can perhaps see yet another, I guess I'd call it unusual uptick as you kind of released those sales and continue to lessen the sales restrictions? Thank you.

Yeah. Thanks, Matt. I think we're still in an unusual environment. The prior-year trends really don't apply to where we are today. Our sales order pace and the sequential pace of our shareholders is really driven by supply, by the homes that we have started, that we have in production that reached the stage that were ready to release them for sales, and so our sales volumes are really governed by or constrained by our homes in inventory where they stand. And so right now, with the visibility that we have to Q1, we believe we're in a position where we will deliver sales that are equal to or maybe slightly better than last year's level, which is an unusual sequential pattern versus where we were in Q4 when we were restricting sales. And then as we move into the year, I think the pattern will still be governed by our inventory levels.

I think what you're gonna see in our forward expectation on sales is kind of aligning with our growth in starts that we've had over the past few quarters. As Bill said, as those homes come through production and reach production stages that we're confident in a delivery date, then we're able to release those to the marketplace for sales.

That's great. Thank you both for that. Secondly, on ASPs, I think the revenue guide from doing the math right, implies maybe mid to high single-digit increases in ASPs in fiscal year '22 give or take. Obviously, your order ASPs have been north of that for two consecutive quarters, if not well north of that here in Q4. Are there any assumptions around geographic or product mix that we should be aware of that might temper closing ASPs into next year?

We're looking at the year as a whole and what our ASP will be for the year will ultimately be dependent on the spring selling season. And so the assumption that these prices for the year will be up mid-to-high single-digit, I think that's fair. We're not going to assume that prices will continue to increase as fast as they have. And so our base assumption will be there will be some moderation in sales prices. We're going to continue to be focused on affordability from an intentional perspective for our business. And so for our initial guide going into the year prior to seeing what the spring will look like, prior to seeing what the supply chain challenges will continue to be. And what that will do to us over the course of the year, we've set our ASP target as you've seen.

Great. Well, thank you all and good luck.

Thank you.

Thanks, good morning, everyone. First question, I was hoping to get a little bit of sense of how you're thinking about gross margins? At least perhaps directionally through fiscal '22 and even longer term. Understanding, obviously, a lot is in flux. But as you look through the rest of the year, obviously good people are focusing on the reduction of lumber cost, as a tailwind. At the same time, you have some other headwinds in terms of additional cost inflation and I guess, assuming incentives and discounts are steady, just trying to get a sense of how you think at this point between lumber and other areas of cost inflation in the current pricing that you have in place, how things might progress throughout the rest of '22.

We really don't have much visibility to our gross margin past a quarter or two, so you heard our specific gross margin guide for fiscal Q1, which was essentially relatively in line with Q4. As Bill mentioned, continued lumber headwinds in that December quarter. Some of that does back off as we move throughout next year. But ultimately, the gross margin that we achieved for fiscal 2022 as a whole is going to be dependent on the strength of the spring selling season, which we're pretty far out on. But I think we do feel with the strength in today's market, we should be in a very good position to continue to hopefully at least maintain gross margins from here. But we'll update as necessary as we move throughout the year and see how the spring unfolds and some of these supply chain pressures that are continuing to drive some cost increases.

Right. Appreciate that. I guess also just longer term. You're in a new state of play here in terms of plus or minus around 27%. Just 3 years ago you were at closer to 20% and versus the last cycle. I think your peak was around 25.5% in 2005. Over the next 2, 3, or 4 years, as your underwriting deals today, and just curious, obviously, you underwrite them for returns, but there was a gross margin component in that. How should we think about a quote unquote normal or even a new normal? Again, assuming that we don't have this over the next 12 to 18 months, like a complete mean reversion to a let's say, a fuller incentive pipe backdrop or whatnot.

Appreciate that, and it's a great point. One, we do focus first and foremost on returns and not just the margin. You're right, it is a component of the return equation. And three years ago, as you mentioned we were around 20% and if we had said at the time, we think three years from now, we will be at 27%. I don't think we'd have gotten a lot of credibility for that prediction. So it's really hard, as Jeff mentioned before, to really give us any great degree of confidence in predicting accurately what margins will be several periods out. I do think in our forward underwriting is that we are encouraged by what we see and what we'll be able to achieve in margins going forward. And ultimately it's the return and the cash back that's driving our investment decisions today.

Two factors that we can't specify have raised many questions about other structural changes in the business that could help sustain a higher gross margin over the long term than what we've historically experienced. While these changes may not be sufficient to maintain a 27% margin, we believe we can uphold some scale advantages that should lead to margin improvement. Additionally, we expect a reduction in our cost of sales. With the actions we've taken to reduce our leverage, we anticipate consistently lower costs of sales moving forward.

Coincidentally, it's a maturing industry. My anticipation is, you're going to see more stability than typically has been associated around prior cycles. I think there is a consistency discipline in the industry today, that has never existed.

One last quick question, if I could sneak it in, how should we consider the community count and sales pace in 2022 compared to 2021 in terms of growth from both aspects?

It's going to continue to be mainly driven by absorption rather than community count. We would expect for the full year to have a modest increase in our community count. But I think as I referenced at pre-call at the outset of the call. If we have the houses and lots, we're going to ultimately sell and close the house. And so that's generally the better indicator of where our business is going and just what our absolute community count is doing.

Great. Thank you.

Thanks, Mike.

Hi. Good morning, everyone. Nice quarter and thanks for taking my questions. My first one is on your start space in October, 8-K Ohio Homes that possess a pretty solid rate. Perhaps there's some timing benefit here. But can you walk us through some of the puts and takes to a normalized touch pace near-term, or is this a good run rate for 2023 deliveries with perhaps upside when supply chain improves?

I believe the run rate we are aiming for is clearly defined for the first four to six months of this year. This is a steady run rate we are targeting. Our guidance and projections for the year are based on the current state of the supply chain. We need to hold more homes and inventory to support the double-digit growth compared to what we have done in the past. We are preparing for how the spring season will unfold and are monitoring the material and labor supply challenges to see if they get better or worse.

It's a lot easier to slow down our start than it is to speed it up. So we consistently adjust our start based on what our forward outlook is.

What we control is our liquidity, and our process, and our targets. And we're very focused on the liquidity because it's a risk mitigator that allows us to be more flexible in what we target and how we operate.

We've already talked on this call about we are in an unusual time in terms of how our sales pace looks. We're also in an unusual time in terms of historical measures of our homes and inventory relative to what we can close, with extended construction times and all the disruptions. As David said, we have to hold more homes in inventory to deliver the same number of closings today versus a few years ago.

The offset to that is we own a lot of land in terms of years supply, so we are still driving very impressive returns.

Well, again, we're very focused on liquidity and maintaining the flexibility that is a key competitive advantage, I think for whatever happens in the market.

All fair comments. Thanks for that. My follow-up is pretty high-level question to the extent you're just willing to discuss. How do you think the supply chain is going to play out? Do appreciate that the visibility is not great beyond a quarter or more at best, but just given the current state, what are your thoughts on the realistic best-case, worst-case scenario playing out in fiscal 2022? Or even if you don't want to go all out to 2022, what are some of the scenarios as we enter the spring selling season? Thank you.

From a supply chain standpoint, I think you've got some of the best companies that have ever existed in the history of the world focused on that, and I think they're going to get it figured out. And the people that we do business with are the best of the best in that industry, so I'm very confident. Was it Q1, Q2, Q3? I don't know that, but I am very confident that the people that are working on it are going to get a result, and when that happens I think we will return to an inventory conversion rate that's consistent with what we've done in the past, maybe even a little better.

All right, that's great. I'll pass it on, thanks very much and good luck.

Thank you very much.

Hi, this is Asher Sohnen on for Anthony and I just want to ask, you mentioned that you need more homes in inventory now to deliver the same number of homes. Are you able to articulate a target or maybe your normalized spec count for this kind of new normal? And then when supply chain do clear up, do you expect to reduce that spec count eventually, or because it's become like the new normal going forward?

Absolutely. When we return to a more normalized time, we would expect our inventory turns to revert to historical norms, or as David mentioned, potentially even better. Traditionally, at the beginning of the year, we would take our homes in inventory and typically double that figure to estimate what we would close in the following year. There have been times we performed slightly better or worse than that. Given the current challenging environment, if it persists, we likely won't achieve that target. Our guidance reflects this expectation. However, once we return to a more standard situation, we aim to reduce our spec count, turn our inventory, and focus on maximizing our returns as much as possible. This is a direct response to the current environment and the extended construction times we are experiencing.

Great. And then as a follow-up, just understanding that the sales declines in the quarter is kind of a function of supply. But I'm just curious. Have you seen any markets where maybe prices are starting to get a bit frothy or that you're concerned around affordability, maybe seeing some buyers start to walk away around the margins?

I think it's pretty clear that the market is not as white hot right now as it was in the spring. But we're still seeing very strong demand, and the homes that we're releasing for sale are still being absorbed quite well with very historical low levels of incentives in place. So we're seeing very few homes complete construction that are not being sold prior to that completion process.

And I'd also say that even though our ASP has gone up and it's not a sustainable rise quarter-to-quarter-to-quarter, but it is something that I think indicates the level of demand out there when you restrict the number of houses you sell. It's a good time to be selling houses today.

Demand still exceed supply?

Yes.

And I think, in terms of Mike's comment is not quite as high as spring. We are seeing, I think, somewhat of a return to normal seasonality as well. We wouldn't expect the market to be as strong today as it is during the spring selling season. So we still feel very good as we move throughout fiscal '22, that the market is going to remain robust.

Those 900 homes we have that are completed and unsold, less than 100 have been completed for an extended period of time, out of almost 50,000 homes.

Thanks, that's very helpful. I'll turn it over.

Thank you very much. On the land side, you said that sequentially lot costs were up 2% quarter-over-quarter. How much do you think they're up year-over-year?

They are up about a mid-single-digit percentage, which has been pretty consistent year-over-year since last year.

Okay. That's somewhat surprising because I think, historically, land usually appreciates in line with appreciation, or perhaps at a faster clip. Do you expect lot costs to begin accelerating? Is the moderate pace of growth reflective of the timing at which you acquired these lots?

That's got a lot to do with it, Jade. The homes we're delivering this quarter come from a wide range of land acquisitions and the timing of when we contracted for the land and lots, resulting in a diverse mix. We're generally experiencing cost inflation in our lot costs and what we're currently purchasing, but the immediate impact is muted, and it will take several years for these costs to be fully reflected in our closings.

And this is one of the strengths of our long lock for lot pipeline and our controlled lot position because we've got land and lots controlled generally at fixed prices or at known prices and so we reap the benefits of that by having a strong controlled lot position.

Thanks for taking the questions.

Hey, good morning, everyone. Thanks for taking my questions, and Paul, congratulations on the promotion. Just wanted to follow up on a prior question, but your '22 closings expectations up about 11% year-over-year at the midpoint. You all mentioned material shortages and multiple products currently, but David, you've made a couple of comments that you expect improvement in 2022. I'm just trying to understand what are your suppliers telegraphing you with respect to 2022 capacity. Are they adding employees, lines, etc.? Just what sort of level of growth do they think they can support?

We have commitments from all our main material suppliers who are ready to support us. They are aware of our figures and our goals. They understand our starting base for the past six months and the upcoming six months. These are reputable companies, and while I won't mention specific names for fear of forgetting some, I can say that the CEO of Oracle met with Don Horton, myself, and the entire executive team, which reflects a new level of partnership and commitment that didn’t exist before. As a result of the consolidation in the industry, the 10% market share of new home housing is a significant statistic.

And in our conversations they are hiring, they are opening new lines, unemployment benefit going away is expected to have some impact. I think some of the extended impacts from the Texas freeze is also expected to be worked through as we move into calendar 2022. And as David said, these things are taking a while to work through, but they are doing what they need to do to help support our business. And as always, we expect them to support D.R. Horton's business first and for a lot of those pressures to be solved what smaller builders versus us.

Having significant scale in these markets is a huge benefit for us and really provides us with greater access and better service than some of the smaller competitors with less scale.

Having a forward locked pipeline of over 0.5 million lots makes it pretty powerful as a conversation piece in talking with the large suppliers.

Okay, fair enough. In your capital allocation priorities, I didn't hear anything about mergers and acquisitions. Could you discuss the situation in your pipeline regarding any stretched valuations? Also, could you explain the decision behind creating the Co-COO position?

Sure. I'll take the first question and let David handle the second question. The M&A landscape is pretty similar to where it's been the past few quarters. It's anecdotal. We're not looking for any major transformational M&A opportunities. It would be hard for us to accomplish one of those at the scale we're at today. But we are looking at tuck-in acquisitions to add great platforms and people to the team across the country, where we maybe looking for growth. And it's an ongoing conversation with people in that process, but don't look for any major use of capital on that front today.

Regarding the Co-COO program, our platform has essentially doubled in size over the past five years. During COVID, it became increasingly challenging to travel not just for executive officers but also for regional presidents, which made us hesitant about asking for employee relocations. In a previous call, I mentioned infrastructure, but I want to clarify that I was referring to our platform, which involves a dual COO role and an expansion of our reach. We continue to scale our platform to align with the market share we are gaining. We have exceptional talent performing at high levels, but as we progress, we need to adapt to the changing environment and skill requirements. It's important to mentor younger employees, placing them in regional roles to work effectively within divisions instead of overseeing them. This involves a training process. Even with a strong market and increased absorption, our growth in personnel must match. Having Paul enables us to engage with regional personnel more frequently and enter new markets consistently. By expanding our regional presence, we can promote individuals to leadership positions, ensuring they gain experience before any urgent transitions arise. This approach is essential for our continued growth over the next five years. Our management team is robust, and I constantly reflect on the quality of our employees at both division and regional levels compared to when I joined the Company or when we went public. The Company is in an excellent position with outstanding people, and Paul will help us enhance that further.

Perfect. Thank you all.

Thank you. Two things. First of all, in terms of the spring selling season, I know that you don't have visibility to it. And so there's, by definition, some degree of uncertainty. But as you look at your position and what you're seeing in the market now, could you identify these as the areas of notable uncertainty that you just won't know until you get to the spring?

That's the unknown-unknown. Always a great question. It's one of the things we're always trying to ponder and peer around the corner and figure out what's going to happen. But one of the big unknowns going into the year is not from a demand side, but from a production capacity side. As David said before, it's going to get better, stay the same or get worse. I mean, it may different parts of it maybe law free over the next six to nine months and being prepared to handle those challenges is what we deal with every day. As we say, when people want to and can buy homes, we can solve the rest of the problems, that's our job. Still see good demand trends out there, still see very good traffic, this fall in the models. Quality of traffic, interest of traffic, and our participation has been really strong, starting to fall. So that for us, that would be a good sign for continuing what happens.

What we can control, Eric, is inventory and how we position it to be in front of the spring market, and we feel very good about that. We can set targets, create a plan, execute that plan, and then respond to the market as it evolves.

Okay. That's helpful. And then secondly, a lot of talk about affordability earlier in the call and I know there's a lot of components of affordability, but ultimately, for your customer, it's them paying the price for the house. And the order ASP, I think coming out of is now 380,000, which is certainly different than it was two or three years ago for the Company. I'm just curious how you think about that. If especially, how you think about it relative to the different products that you have and relative to markets. How do you think consumers respond to that, customers respond to that and the path forward?

We have discussed our focus on providing more affordable homes and being the more affordable option in the market. Our mortgage company statistics show that nearly 60% of our buyers this quarter were first-time homebuyers, and about 60% of them reported a combined household income of $90,000 or less for mortgage purposes. This indicates a strong target market for us to continue serving. Despite increases in pricing and average loan sizes, the debt-to-income ratios we observe in the loans we're underwriting have remained stable.

And as the industry as a whole has continued to increase sales prices, generally speaking, we still do have the lowest average sales price generally than almost all the large public builders.

Okay, that's helpful context, thank you.

Thank you.

Good morning, everyone. I appreciate you accommodating me today. I would like to focus on the rental operations as we break them out this quarter, particularly since we achieved over $700 million in revenue, indicating some strong growth plans. Starting with the single-family rental segment, I’m interested in your insights on how the rollout is going, any surprises you've encountered, or aspects that have reinforced your views as you begin leasing and selling communities. Are you observing any notable trends regarding your renters? Are they primarily long-term renters choosing to lease? Are they individuals awaiting new homes to be constructed? Any anecdotal evidence or data that you can share would be helpful. Looking ahead, what proportion of the business do you aim to target for this segment?

I would say that the renters are not terribly different than first-time homebuyers. People moving into areas, they're looking for housing, they're looking for a better lifestyle. Things that probably have surprised us, level of demand and the lack of, not only from a rental standpoint, but from what I consider institutional type investor base that has bought the three that we saw. It may not be a white-hot for sale business this year compared to last year, but it is a white-hot build a ramp business, especially the way we're positioning these projects as kind of on the affordable land, self-contained, not intermixed with for sale housing.

Got it, so on that note, David, with strong as demand has been, I guess, first off, is the 35% margin that you guys generated at that business, is that a realistic intermediate-term margin on that $700+ million of revenue? And is the plan still to do the merchant-build approach? You mentioned the institutional capital, a lot of your peers have either partnered up with some of those investors and established joint ventures or some ongoing investment there. It seems like you're kind of choosing more of the merchant-build approach. So profitability and longer-term, any reason why maybe the strategy changes there.

We've got a small sample size thus far on those that we've plugged and have been very pleased with the profit levels we've seen. I expect we will still see some projects that will generate those level of profits, but as we grow the platform and as we build the infrastructure in place to support a larger volume across the country, we wouldn't necessarily expect to continue to generate the same margin that we've shown on these first few, but do expect pre-tax profit margins to be higher on the rental business than on our for-sale business and to generate an accretive return, it needs to be a little bit higher because of the assets that are held a little bit longer. We do still expect to see very attractive profit levels on the rental business, but the current sample size is still a little bit small.

I will say that everything we worked on, everything we think about, we want to do things that are sustainable and scalable, and I can tell you that the rental side of this market certainly seems sustainable and with our platform is scalable. So we're pretty excited about it.

Great, thanks for all the color there guys.

Thank you, Tom. We appreciate everybody's time on the call today and look forward to speaking with you again in January on our first-quarter results. And finally, congratulations to the entire D.R. Horton team. You were the first home builder to close more than 50,000 homes, you are now the first to close greater than 80,000 homes in a year, and you're well on your way to becoming the first home-builder to close more than 100,000 homes in a year. Stay humble, stay hungry, and stay focused. You'll compete and continue to win every day. Thank you.