D.R. Horton Inc (DHI) — Q2 2022 Earnings Call Transcript

Thank you, Holly, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2022. Before we get started, today’s call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.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 obligations 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 in the next day or two. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice Presidents and Co-Chief Operating Officers; and Bill Wheat, our Executive Vice President and Chief Financial Officer. D.R. Horton team delivered an outstanding second quarter, highlighted by a 59% increase in earnings to $4.03 per diluted share. Our consolidated pre-tax income increased 60% to $1.9 billion on a 24% increase in revenues. And our consolidated pre-tax profit margin improved 520 basis points to 23.5%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 40.3%, and our consolidated return on equity for the same period was 34%. These results reflect our experienced teams, the production capabilities and our ability to leverage D.R. Horton scale across our broad geographic footprint. Housing market demand remained strong despite the recent increase in mortgage rates and we are focused on maximizing returns while continuing to aggregate market share. There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market. Our construction cycle times were extended further this quarter, and we continue to work on stabilizing and then reducing our cycle times to historical norms. After starting construction on 24,800 homes this quarter, our homes in inventory increased 30% from a year ago with only 600 unsold completed homes across the nation. With 33,900 homes in backlog, 59,800 homes in inventory, a robust lot supply and strong trade and supplier relationships, we are well-positioned for consolidated revenue growth of greater than 25% this year. We believe our strong balance sheet, liquidity and low leverage position us to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations, while managing our product offerings, incentives, home pricing, sales pace, and inventory levels to optimize returns.

Earnings for the second quarter of fiscal 2022 increased 59% to $4.03 per diluted share compared to $2.53 per share in the prior year quarter. Net income for the quarter increased 55% to $1.4 billion compared to $930 million. Our second quarter home sales revenues increased 22% to $7.5 billion on 19,828 homes closed, up from $6.2 billion on 19,701 homes closed in the prior year. Our average closing price for the quarter was $378,200, up 21% from the prior year quarter, while the average size of our homes closed was down 1%.

Our net sales orders in the second quarter decreased 10% to 24,340 homes, while the value increased 10% from the prior year to $9.7 billion. Our average number of active selling communities increased 1% from the prior year quarter and was up 4% sequentially. The average sales price of net sales orders in the second quarter was $400,600, up 23% from the prior year quarter. The cancellation rate for the second quarter was 16% compared to 15% in the prior year quarter. New home demand remains very strong despite the recent rise in mortgage rates. We are continuing to sell homes later in the construction cycle to better ensure the certainty of the home close date for our homebuyers with virtually no sales occurring prior to the home construction start. We expect to continue managing our sales pace in the same manner for the rest of the year.

Our gross profit margin on home sales revenues in the second quarter was 28.9%, up 150 basis points sequentially from the December quarter. The increase in our gross margin from December to March reflects the broad strength of the housing market. The strong demand for homes, combined with a limited supply has allowed us to continue to raise prices and maintain a very low level of sales incentives in most of our communities. On a per square foot basis, home sales revenues were up 4.8% sequentially. While stick and brick costs per square foot increased 2.5% and our lot costs increased 2.8%. We expect our costs to continue to increase. However, with the strength of today's market conditions, we expect most cost pressures to be offset by price increases in the near term. We currently expect our home sales gross margin in the third quarter to be slightly better than the second quarter.

In the second quarter, homebuilding SG&A expense as a percentage of revenues was 6.8%, down 80 basis points from 7.6% in the prior year quarter. This quarter, our homebuilding SG&A expense as a percentage of revenues was lower than in any quarter in our history, and we remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports our business.

We started 24,800 homes during the quarter, up 5% from the second quarter last year, bringing our trailing 12-month starts to 95,300 homes. We ended the quarter with 59,800 homes in inventory, up 30% from a year ago. 26,000 of our total homes at March 31st were unsold, of which only 600 were completed. Our average construction cycle times for homes closed in the second quarter increased by almost two weeks since our first quarter and over two months from a year ago. Although we have not seen improvement in the supply chain yet, we continue working to stabilize and then reduce our construction cycle times to historical norms.

At March 31st, our homebuilding lot position consisted of approximately 570,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. 23% of our total owned lots are finished and 47% of our controlled lots are or will be finished when we purchase them. Our large capital-efficient lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land, and development totaled $2.1 billion, of which $1.2 billion was for finished lots, $630 million was for land development, and $260 million was to acquire land.

Forestar, our majority-owned residential lot development company continues to execute well. During the second quarter, Forestar reported total revenues of $421.6 million and pre-tax income of $63.2 million. For the full year, Forestar expects to deliver 19,500 to 20,000 lots, and generate $1.7 billion of revenues with a pre-tax profit margin of 14% to 14.5%. At March 31, Forestar's owned and controlled lot position increased 14% from a year ago to 96,500 lots. 57% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $390 million of our finished lots purchased in the second quarter were from Forestar. Forestar is separately capitalized from D.R. Horton and had approximately $580 million of liquidity at quarter end with a net debt-to-capital ratio of 29.9%. Forestar's strong capitalization, lot supply, and relationship with D.R. Horton positions them to continue their profitable growth.

Financial services pre-tax income in the second quarter was $92.8 million with a pre-tax profit margin of 41.8%, compared to $107.7 million and 47.8% in the prior year quarter. For the quarter, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 68% of our homebuyers. FHA and VA loans accounted for 41% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 724 and an average loan-to-value ratio of 88%. First-time homebuyers represented 55% of the closings handled by the mortgage company this quarter.

Our rental operations generated pre-tax income of $103 million on revenues of $223 million in the second quarter. During the quarter, we sold one multifamily rental property consisting of 126 units for $50 million and we sold three single-family rental properties totaling 368 homes for $173 million. Our rental property inventory at March 31st was $1.5 billion, compared to $544 million a year ago. Rental property inventory at March 31st included approximately $600 million of multifamily rental properties and $900 million of single-family rental properties. As a reminder, our multifamily and single-family rental sales and inventories are reported in our rental segment and are not included in our homebuilding segments homes closed revenues or inventories. During the quarter, our rental operations subsidiary, DRH Rental, entered into a four-year $750 million senior unsecured revolving credit facility. Availability under the rental revolving credit facility is subject to a borrowing base calculation based on unrestricted cash and the book value of DRH rental real estate assets. There were no borrowings outstanding on the rental credit facility at quarter end. We now expect our rental operations to generate more than $800 million in revenues during fiscal 2022. Our third quarter rental sales will be lower than the second quarter and fourth quarter sales will be the highest of the year. We also now expect our total rental platform inventories to grow by more than $1.5 billion in fiscal 2022 based on current projects in development and a significant pipeline of our future projects. We are positioning our rental operations to be a significant contributor to our revenues, profits, and returns in future years.

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. At March 31st, we had $3.2 billion of homebuilding liquidity, consisting of $1.2 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. Our homebuilding leverage was 16.4% at the end of March and homebuilding leverage net of cash was 11.3%. Our consolidated leverage at March 31st was 24.9% and consolidated leverage net of cash was 18.9%. At March 31st, our stockholders' equity was $16.8 billion and book value per share was $47.66, up 33% from a year ago. For the trailing 12 months ended March, our return on equity was 34% compared to 27.1% a year ago. During the first six months of the year, our cash used in homebuilding operations was $416 million, which reflects our increased homes and inventory to meet demand and the impact of extended construction cycle times. During the quarter, we paid cash dividends of $79.1 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3.1 million shares of common stock for $266 million during the quarter for a total of 5.8 million shares repurchased fiscal year-to-date for $544.2 million, an increase of 30% compared to the same period a year ago. Subsequent to quarter end, our Board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorization. The new authorization has no expiration date. We now expect to reduce our outstanding share count by 3% during fiscal 2022. We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.

As we look forward to the third quarter of fiscal 2022, we expect market conditions to continue to reflect strong demand from homebuyers with continuing supply chain challenges. We expect to generate consolidated revenues in our June quarter of $8.6 billion to $9 billion and homes closed by our homebuilding operations to be in a range between 21,500 and 22,500 homes. We expect our home sales gross margin in the third quarter to be in the range of 29% to 29.5% and homebuilding SG&A as a percentage of revenues in the third quarter to be around 6.6%. We anticipate a financial services pretax profit margin of approximately 40% and we expect our income tax rate to be roughly 24% in the third quarter. For the full fiscal year, we expect to generate consolidated revenues of $35.3 billion to $36.1 billion and homes closed by our homebuilding operations to be in a range of 88,000 to 90,000 homes. We forecast an income tax rate for fiscal 2022 of roughly 24%, and we now expect that our share repurchases will reduce our outstanding share count by approximately 3% at the end of fiscal 2022, compared to the end of fiscal 2021. We still expect to generate positive cash flow from our homebuilding operations this year, and we will continue to balance our cash flow utilization priorities among our core homebuilding operations, increasing our rental inventories, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares.

In closing, our results and positions reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across our multiple brands. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to continue aggregating market share and effectively operating in changing economic conditions. We plan to maintain our disciplined approach to invest the 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. We are incredibly well-positioned to continue growing and improving our operations during the remainder of 2022 and in future years. This concludes our prepared remarks. We will now host questions.

Thank you very much. Good morning everyone. Back in January, you mentioned that orders were flat, perhaps slightly increased in the quarter. However, they actually decreased by 10. Could you provide some insight into how orders progressed throughout the quarter? Also, I'm assuming you're aware that the production side was not keeping pace and in fact was worsening, leading you to reduce order rates, or is there also a demand factor involved in this?

Carl, I think it was all our decision to slow sales orders based on production capacity. I think we saw and continue to see very good demand and more buyers, qualified buyers out there for our homes today when we release them for sale. But we did see during the quarter that our cycle times continued to extend, and we made the decision in several of our geographies to delay the release of homes until we could give a better delivery date to those customers and provide a better experience for them in the backlog process. So we saw a very strong demand in the quarter, but we did see the cycle times elongate. I think we added two weeks this quarter, unfortunately, and we wanted to make sure we did not create more buyers in backlog with an unhappy experience.

Great. Thanks Mike. And then you didn't discuss the Vidler Water transaction, and I would just like you to give an overview of the strategic rationale for that deal and whether or not this is a function of the assets related to water rights or if this is a business that you think potentially could grow? Thanks very much.

Sure, Carl. We put out pretty much what we're going to say about Vidler in the press release in terms of owning a portfolio of premium water rights and other water-related assets across several of our Southwest markets that generally lack adequate supply. We mentioned the total value of the transaction is approximately $290 million and we do expect it to close in the next month or two. But considering it's subject to the successful completion of a tender offer, we don't have much to say at this time and I look forward to talking about that in the coming quarters after it closes.

Well I tried. Thanks Jess, thanks everybody.

Good morning everyone, and thank you for taking my questions. My first inquiry is regarding the likelihood of activity moderating due to higher rates and prices. My concern, which I believe is shared by some investors, is how a potential moderation in activity might impact your views on capital allocation. Specifically, will you consider reducing land purchases and potentially increasing share buybacks and similar actions?

Thanks John. We're always focused on aggregating market share and we're positioning ourselves to continue to do that through any economic cycle. Certainly, at some point, the impact of rates and affordability will have some impact on demand, and we certainly will adjust our capital allocation at that time. But we believe we're in a strong position to continue to grow. But certainly, those impacts on demand would impact our investment decisions in land at that point in time.

Okay, that's good to hear. And then on the option percentage getting up to 77%, I mean, that's much higher than anyone thought it when the Forestar acquisition occurred and seeming going back a few years ago. I mean could this get much closer to, call it, 90% and that's just a random number, but just 90% plus, getting closer to what MVR does and how does this impact the strategy with Forestar, as its grown and become spread across a lot of your communities? I mean you do have the option to bring that ownership position down pretty significantly and still maintain the favorable contract terms. So, just curious how you're thinking about Forestar longer term?

We have been concentrating on the overall auction lot percentage and plan to keep doing so. There is a limit of 100%, but our aim is to improve and become more efficient. Regarding Forestar, I am quite pleased with its performance. At some point, it will deconsolidate, but we believe there are still many markets where we can expand Forestar. Considering the earnings generated, our shareholders benefit significantly from Forestar; it remains a strong investment. While it will deconsolidate eventually, this is primarily related to their platform development rather than our intent to sell off a portion of our shares.

Thanks guys.

Thanks John.

Thank you very much, everyone. Congratulations on the strong results. With the significant increase in rates, there are concerns that things may slow down, which I believe John mentioned aligns with people’s expectations. I have two questions regarding the rise in rates. Firstly, are you planning any changes for the communities expected to open in the next year or two, such as adjusting home sizes, amenity levels, or anything similar? Would these changes affect the gross margin? Secondly, could you explain why we haven’t seen any impact in your communities, considering affordability is a growing concern? Based on your conversations with customers, what role do rate locks play, or is there anything else that could clarify why we haven’t observed any changes yet?

Stephen, regarding your first question about community design and plan design, we intend to keep our focus on the affordable range to attract those buyers. I don't anticipate a major change in our building approach or the types of homes we construct. However, if the demand for affordability continues to rise, we may introduce homes that are smaller, but this won't represent a significant departure from our current strategy. Concerning our communities and sales offices, there is definitely some apprehension among potential buyers about interest rates. However, since we typically sell later in the process, we face less exposure to fluctuations in rates compared to if we were selling earlier. This is why we have opted to limit our sales efforts to a later timeframe, allowing us to input customers into our backlog at rates more aligned with what they will actually encounter at closing.

That makes a lot of sense. In this quarter, can you give us a sense for how many of your closings were done with a rate lock that the closings I'm referring to, not the orders?

Yes. So I looked at it actually on a forward-looking basis, and we have essentially our next month, so April, 100% locked. And then as you would expect, that percentage ticks down, but it's the majority of the quarter's closings that are locked and you got to get to four-plus months out before that's a more de minimis percentage.

Okay, great. Thanks very much guys.

Thank you. Good morning and congrats on the strong results. Maybe you guys can just give us some perspective on the rental business with both the merchant build single-family rental communities as well as your multifamily projects. Can you talk about how many of them you're developing are already pre-sold? And have you seen any changes in valuation as it relates to selling with the surge in rates as we hear chatter that values at least within multifamily have really started to be pressured? And just the overall buying appetite that's out there with so much capital still appears to be chasing this asset class?

Thank you, Ivy. We are witnessing significant demand and effective pricing execution. Currently, we do not sell any of our communities during the development phase; instead, we sell them during the lease-up phase at stabilization. We are still experiencing strong demand and effective pricing on the transactions we have completed. Regarding the current outlook, while cap rates may be influenced by rising interest rates, we are also observing robust leasing demand and substantial rental growth, which certainly impacts cap rate expectations.

And at a 40% to 50%-plus margin on these sales, if the market were to soften a bit, we still expect to generate very strong profits and returns.

Great. And then just secondly, with respect to the delay in and obviously, the industry is impacted. Can you walk us through on the development side with municipalities, like components of the overall impact is related to like the difference versus sourcing materials because some materials are not a problem anymore. So, everyone talks about it's a whack-a-mole, but what's it like on the development side as well as on the municipality side and how much of that is impacting the two-month year-over-year increase in cycle time?

I believe there are definitely challenges with municipalities during the entitlement process when it comes to bringing new lots to market. We have not yet seen a complete recovery in municipal activities, particularly regarding permitting and inspections. This situation is affecting our progress as we navigate supply chain issues before moving homes to the next stage. We are experiencing delays in inspections and municipal services, which contributes to the extended cycle times we are observing.

And let me just sneak in one last one, if I could. Just with respect to the inflation that we've seen. Can you be more specific on recognizing your land is predominantly controlled via option. Like what has changed on the pricing lot of inflation that you are buying outright? Are you seeing relative to a year ago? And maybe just to be just general because it's obviously different by market.

I'd say the overall land market has tracked the sales price of homes. So, it is good to be in a position where we control 550,000 lots at prices contracted two years ago, three years ago, four years ago and not be in a position today where we have to go buy something. So, we are looking at that. We're monitoring it. I believe liquidity is going to drive market share gains and the ability to not be at risk of credit markets and/or banks is a huge competitive advantage for us and we're going to protect that. We're going to be conservative in our land searches; there are good deals out there that we put under contract this year that we will take to close. But we are not in a position where we have to go buy anything. And we're going to, I think, see a significant benefit from that as we proceed through this market.

Thank you. Good luck.

Thank you.

Morning everyone. Thank you for taking the questions. Just another question on what you medium term perspective from what you can control in a scenario where housing activity were to slow, as we're talking about this morning, what does D.R. Horton do from a supply perspective? To what degree does your own plans for community replenishment or starts flex with these changes in interest rates and demand, just thinking again medium-term annual volume growth? How should we think about how you all are viewing that? Thank you.

Matt, we're very much a bottom-up community level driven company, and we're going to evaluate demand we see at each individual community and submarket and look for home starts to match that demand that our local operators are seeing. And that couples with community replacement needs in those submarkets based upon demand we see in real time in the field. So in the near term, we'll continue to adjust starts. In the more medium term, we'll look at subdivision openings and phase sizing. And then as well as Paul touched on before, we may be adjusting some product to some smaller sizes, if that's appropriate for the given market.

Got you. Okay. That's very helpful. And then secondly, just zooming in back to the very near term, I think you've seen maybe in some of the housing data, maybe a little bit in our own survey work, it seems like some trends in the housing market might have become a little more choppy in recent weeks, perhaps not surprising given the move in interest rates. But just anything you're seeing on the leading edge, on the margin, whether that's any sort of pockets of changes in demand or again, incentives appearing and various markets? Just anything you're seeing later into March and into April? Thank you.

The increase in rates is pushing some individuals out of the homebuying market. However, there are still more qualified buyers wanting to purchase homes than we can currently supply. Back in 2018, we experienced a quick spike in rates that significantly dampened demand, but once the initial shock wore off, demand rebounded strongly. In this current cycle, which has experienced even steeper rate hikes, there are indeed some people who can no longer qualify, but overall demand remains robust. The desire to own a home continues, possibly fueled by rapidly rising prices and even faster escalating rents, along with the discussions around inflation and the benefits of locking in housing costs for 20 years. Homeownership is highly valued today. Many millennials and individuals moving from other markets to areas of growth are eager to own homes, secure their housing expenses, and settle in neighborhoods where they can raise families.

Well, thank you for that David, and thanks everyone, and good luck.

Thank you.

Good morning. Cancellation rates, I guess, picked up a 100 basis points, maybe from record low levels. Would you characterize that as more kind of noise or maybe more clearly, customers no longer able to secure mortgages? Would you expect cancellations maybe decline again in 3Q if rates stay at their current level? And I think in the past, you've provided kind of a sensitivity analysis around sort of mid-single-digit, high single-digit backlog that potentially could be at risk with 100 basis point rise in rates. Any sort of thoughts on how that has shaken out now that we're above 5% now on rates?

Certainly, Anthony. We consider a 1% change in our cancellation rate to be essentially flat, and it remains historically low. Our typical rates are in the high teens to low 20s, which is where we feel comfortable. The main issue continues to be that buyers often cannot qualify for a home purchase. So, whether the cancellation rate is around 15%, 16%, or 17% each quarter, we have no concerns there. Regarding rate sensitivity analysis, we've conducted the same assessment as in previous quarters. Rates have recently increased to a level we analyzed a couple of weeks ago, and currently, only about 10% of buyers in the backlog might be at risk. As I noted earlier, all of April's buyers are already rate locked if they are going through a mortgage company, so that aspect is secure. We also look to assist buyers by exploring different loan options or verifying additional income. Furthermore, as others have mentioned today, for those buyers who unfortunately cannot qualify, there is no shortage of interested buyers ready to take their place.

Okay, that's very helpful. And then just with higher rates, are you making any strategic shifts to target a different mix of buyers? Are you seeing buyers that you wouldn't normally talk to kind of moving down market to more affordable offerings and understanding your entire offering is fairly affordable, like which of your buyer types do you think is best positioned to maybe weather rising rates, does it move up, or any thoughts there?

We really haven't made any significant shift and don't see a need to as rates rise. It's going to be more of that shock to payment for folks when they have to reset maybe the size home or price that they can then qualify for. So, we're going to catch those people that have been buying up that may fall down the price curve and/or size of home and still be able to pick them up in a majority of our communities. So, no real shift in what we're doing with any of our buyer demographics. We're still seeing strong demand, as everyone's mentioned, across the spectrum.

Okay, that’s helpful. I'll turn it over.

Hi thanks. Good morning everyone and thanks for taking my question. I just wanted to revisit the cancellation rate, which I think as you mentioned, Jessica, essentially flat and extremely low. We've kind of thought of it as a key metric to understand the potential impact of the rate move over the last 60, 90 days. And I was curious if you've seen any change throughout the quarter, Obviously, it was up 100 basis points versus a year ago, and I think 100 basis points, I believe, sequentially. But anything throughout the quarter that maybe perhaps you ended the quarter at a higher number than at the beginning. And if there's been any change in April, curious around that.

It was relatively stable throughout the quarter, with about a 1% change. Sequentially, both a year ago and last quarter, we were at 15%. This quarter, we saw a slight increase to 16%, and it remained in that range for the entire quarter.

Okay. Also, throughout the quarter, you said that demand has remained strong, more demand than supply. I would presume then that as a result, your pricing power and the incentives that you've had in the marketplace really haven't changed at all. Obviously, your gross margins continue to improve. And you expect further margin improvement in the third quarter. Just wanted to make sure that was the case as well and it was the case for yourselves as well as if you witnessed any changes in the broader marketplace?

Mike, we have seen consistent ability to raise prices through the quarter, seeing consistent increases in our sales order pricing that then flow through our backlog and through our closing pricing. That's what gives us the confidence to say that our margins are going to be slightly better next quarter, because we can see those sales prices coming through in our closings in the next quarter. So to date, we have not seen a change in our ability to raise prices. I think naturally as we look a little bit longer-term with the impact of rates and the impact of overall price increases. At some point, we would expect that to moderate. But at this point, we have not seen any signs of that as of yet.

Okay. One last quick one, if I could. Just the 3% reduction of year-end share count versus 2% previously. Sorry if I missed this earlier, but I just want to make sure, is that a function of a greater amount of dollars dedicated to share repurchase or in part driven by the recent reduction in share price in the market over the last couple of months?

A little bit of both, Mike. As we look at our capital allocation for the year, our expectations for how much we would utilize, I mean dollars we would utilize in share repurchase has gone up versus our prior estimates. But then certainly, the current valuation of our stock does allow us to buy more shares per dollar as well. And so it's a little bit of both, and that's allowed us to increase our estimate from a 2% reduction to a 3% reduction.

Great. Thanks so much. Appreciate it.

Good morning everyone. Thanks for taking my questions. I wanted to follow up on one of John's earlier questions. I understand that cycle times have been extended and you have 60,000 homes under construction, which impacts net working capital. Now that we're halfway through the year, could you provide an update or possibly a figure regarding your 2022 operating cash flow expectation? Additionally, concerning capital allocation in light of rising rates, it appears that you will continue with your share repurchase program. How do you balance this with the need for increased liquidity, considering the Fed's comments and the potential need for a contingency fund?

Yes, it is a constant balance, Truman. We’re not providing specific dollar amounts for our operating cash flow, but we do expect positive cash flow from our homebuilding operations. On a consolidated level, our operating cash flow includes the investments we're making in our rental platform, which are significant, with an increase of $1.5 billion this year. Additionally, one factor affecting our capital is that our build times are extending beyond two months compared to last year, which ties up a significant amount of capital. However, we are working to stabilize that and improve our cycle times, expecting to start recovering that cash towards the end of fiscal 2022 and into fiscal 2023. It is a balancing act, and as we plan our capital allocation and liquidity targets, we aim to remain in a strong and flexible position to manage current market conditions while positioning ourselves for future growth, aggregation, market share, and returns to our shareholders.

Okay. Thanks for that. And then one final one on just current market conditions. Just are you seeing any metros that are maybe a little bit slower than the others? And then for the buyers purchasing today, I realize this might be somewhat of an unfair question, but how long have they been in the market? Were they really searching before rates started to move, or are we seeing incremental buyers continuing to come in after the higher rate environment that are kind of more recently entered, if you will?

Truman, I think on the markets, we see markets have varying levels of performance and demand, but they're all very strong relative to where they've been. I mean certainly, the migration patterns within the country and the areas that are gaining population have incredibly strong demand, but markets across our footprint, we still see more buyer demand than we have production capacity for today. And so we're still very encouraged by that. Some of those buyers have been in the marketplace for quite a while. Others are more recent entries, but we don't have any hard data we could share with you on how exactly long they've been conducting their search.

Okay. Thank you. And good luck in the upcoming year.

Thanks.

Thanks everyone for taking the question. Good morning. Of the supply chain incremental headwinds, is there a way to think about how much of them are Omicron-related? I'm assuming that should be probably behind us now and how much is kind of carry forward? I think where I'm going with it is, are you baking in any sequential improvement off of that two weeks elongated cycle time assuming there must have been some relief from Omicron?

Yes, I think we would agree with you on the Omicron front. I mean there's certainly still labor challenges in labor and manufacturing facilities, distribution centers, it's still harder to come by, but it does seem to be slightly improving. Drivers continue to be a really big area of need to be able to get products to job sites. In terms of if we're baking in any incremental improvement in our build times. I think, I would tell you for us to achieve the high end of our guidance range. And certainly to do any more of that, we would need to see improvement in our build times from what we've seen today. But we do feel like we're maybe in the early stages of that to where we felt comfortable still, although we lowered our closings guide. We did leave 90 in the range of closing 88 to 90 because we have the houses. It's just a matter of getting them completed and across the finish line with the buyer.

Got it. Staying on the topic of the guide. I don't think you guided for the full year gross margins unless I missed it, but it does definitely look like you have some good tailwinds that can extend into Q4 and give you some good gross margin visibility. Do you want to provide any color on that for Q4?

Yes, Deepa, we do only guide one quarter out on gross margin, but I would agree with you that currently, we do have some tailwinds with the average prices that have been in our backlog and in our recent sales orders that some of which will be homes that would close into Q4. I think we do have some tailwinds. But as we've said many times, our true visibility to margin really doesn't go far beyond the quarter. So we only guide specifically to Q3. But we do feel like we're still going to see very good gross margins through Q4 as well.

That’s very helpful color. Thanks very much and good luck.

Thank you. Good morning. My first question is on the SG&A. I mean, obviously, the gross margin has been impressive, but so has your SG&A performance this year. You continue to come in well-below where we are modeled and where you've guided to, can you talk to the potential to continue to see that coming down now that we're solidly in that 6% range? And maybe where we can get to over time there?

Thank you, Sue. Obviously, an important part of our culture and our business model. We are very focused on ensuring that we stay very efficient with our overhead while still making sure we're building our overhead and our infrastructure to support the growth. But with the price appreciation that we've seen alongside that, that has certainly aided in dropping the SG&A percentage as a percentage of revenue a bit faster, and then honestly, than we would have modeled as well. And so we've been very pleased with that. Certainly, we want to make sure we continue to position ourselves adequately there. But with the prices that we have seen and that we see coming over the next quarter or so, we do expect to still see very good SG&A leverage with the guidance that we're providing for Q3, that assumes another 50 basis point year-over-year improvement in SG&A. So yes, we do see ourselves with an SG&A rate getting down into the sixes and for at least the near term staying there.

Okay. All right. Thank you. And then my second question is a bit longer term. David made the comment earlier around consumer confidence and overall, the desirability around homeownership today and how that perhaps is very different relative to where we were, certainly, coming out of the last cycle. Can you talk to what sustains that level of confidence in home ownership? And what that perhaps could mean even as rates do rise in terms of keeping that demand pool there and people's willingness to continue to extend and really try and make that effort to get into the home?

I have been in this industry for a long time, and I believe the desire to own a home is a significant part of American culture. It provides a sense of security and a foundation for building a family. The downturn in 2008 to 2010, when home values plummeted, significantly dampened the desire to own homes. However, as this cycle progresses, it seems to be extending, with factors like housing formation and the desire to be near good schools bringing home ownership back into focus as part of the American dream. While entering the housing market today is challenging, it's not nearly as difficult as when I bought my first home. It appears there is a cultural shift back towards family and community, resulting in demand that far exceeds the available housing supply.

Okay, well thank you for those thoughts and good luck with everything.

Thank you.

Thank you for taking my questions. I want to clarify that in your full year closing guidance, there is no shift to homes being moved into the rental operation. It seems that you are just slowing down production or slowing down orders in the field to align with production capabilities.

It's about when our homes will be completed and the timing for closing in each quarter. There is no transition to build-to-rent in those numbers. We have kept our homebuilding for sale entirely distinct from what we are reporting on a rental basis.

We have a plan for both businesses. One for the for-sale side of the business and one for the rent side of the business. And the change in the guidance has nothing to do with transitioning communities from one to another. It's solely dealing with the completion of homes, putting the buyer into a completed good-looking house when that house is ready.

Got it. Okay. Thank you for clarifying that. And then my second question, I think David earlier was talking about liquidity being the competitive advantage, especially with land prices moving up. I mean when does this lack of liquidity, I think, especially for some of the smaller private builders, when does that really force a bigger wave of M&A than what we've seen so far in post-COVID?

I don't think it's going to necessitate a larger mergers and acquisitions program. However, their struggle to secure financing for various projects or to start new home construction is likely to create market opportunities for us. This will enhance our ability to increase market share in home sales and allow us to secure longer land positions at attractive prices. Considering the effect of a more than two-month extension of our cycle time on our liquidity, we remain ahead of our competitors in home building speed and are committed to maintaining a strong liquidity position. There is significant pressure on smaller private builders, and at some point, they may decide not to risk everything, especially since they have earned substantial profits throughout their careers by guaranteeing loans. I believe this will create opportunities for us to gain market share, and we are well-prepared to capitalize when that opportunity arises.

Got it. That's great. And if I could sneak one more in, Bill it was encouraging to hear that community count was up year-on-year and sequentially. How are you guys feeling about that for the full year just on a percentage change basis?

We're still anticipating a low single-digit increase, and it's encouraging to see more communities opening up, helping to replenish our community count, which had declined somewhat about a year to 18 months ago. We still expect a solid incremental rise in the number of communities.

And organic growth in our core markets is still going to be the biggest driver, but we did add a few more new markets to our market count this quarter. We're now in 104 markets and have another list of markets behind that that we're planning to expand into as well.

That’s great. Thanks for taking my questions.

Thanks very much. Just a quick question. Given the success that you've had in terms of Express Homes taking share generally, what you're seeing in terms of buyers coming in from competition now and just potentially market share for Express in this environment and how are you seeing that going out?

You cut out a little bit, Dan.

Sorry, regarding the gains for Express in market share, considering the efficiency and affordability there, how are you observing the current situation with consumers?

I think we’ll be able to produce great value at the lower end is a tremendous advantage that we have. The bar pool significantly deeper there, qualification may be a little tougher. But as kind of referenced before, people really want to buy a home and especially their first home. So I see that segment of our business just continue to get stronger. And, whereas, somebody may have pushed up and price at a very low rate, which we have a lot of first-time homebuyers buying in the Horton brand, ultimately it comes down to a payment. And if their desire is to own a home in a very, very nice community location, our competitive advantage just gets better and better.

Great. Thank you.

Thank you, Holly. We appreciate everybody's time on the call today and look forward to speaking with you again to share our third quarter results in July. And to the D.R. Horton family, Don Horton and the entire executive team, thank you and congratulate you on delivering an outstanding second quarter. We are incredibly well-positioned today. You once again have proven you are the best of the best in this industry. Thank you.