D.R. Horton, Inc. (NYSE:DHI) Q1 2023 Earnings Call Transcript

D.R. Horton, Inc. (NYSE:DHI) Q1 2023 Earnings Call Transcript January 24, 2023

Operator: Good morning, and welcome to the First Quarter 2023 Earnings Conference Call for D.R. Horton, America’s Builder, the largest builder in the United States. There will be an opportunity to ask questions on today’s call. During today’s Q&A, we ask that participants limit themselves to one question and one follow-up. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

Jessica Hansen: Thank you, Paul, and good morning. Welcome to our call to discuss our results for the first quarter and fiscal 2023. Before we get started, today’s call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton’s Annual Report on Form 10-K, which is filled 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 tomorrow. 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.

David Auld: 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. The D.R. Horton team delivered a solid first quarter, highlighted by earnings of $2.76 per diluted share. Our consolidated pre-tax income was $1.3 billion, on a 3% increase in revenue with a pre-tax profit margin of 17.5%. Our homebuilding return on inventory for the trailing 12 months ended December 31st was 39.5% and our consolidated return on equity for the same period was 31.5%. Beginning in June 2022 and continuing through today, we have seen a moderation in housing demand due to affordability challenges caused by the significant rise in mortgage rates, coupled with high inflation and general economic uncertainty.

Despite these pressures, we still closed over 17,000 homes and sold more than 13,000 homes in what is typically the seasonally slowest quarter of the year. We have seen increased sales activity in the first few weeks of January. While higher mortgage rates and economic uncertainty may persist for some time, the supply of both new and resale homes at a portable price points remains limited, and the demographics supporting housing demand remained favorable. We are well-positioned to navigate the current challenging market conditions with our experienced operators, affordable product offerings, flexible lot supply and great creative supplier relationships. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility.

We will continue to focus on turning our inventory and managing our product offerings, incentives, home pricing, sales pace and inventory levels to meet market, optimize returns, consolidate market share and generate increased cash flow from our homebuilding operations. Mike?

Mike Murray: Earnings for the first quarter of fiscal 2023 decreased 13% to $2.76 per diluted share compared to $3.17 per share in the prior year quarter. Net income for the quarter decreased 16% to $958.7 million, on a 3% increase in consolidated revenues to $7.3 billion. Our first quarter home sales were $6.7 billion, on 17,340 homes closed compared to $6.7 billion on 18,396 homes closed in the prior year. Our average closing price for the quarter was $386,900, up 7% from the prior year quarter and down 4% sequentially. Paul?

Paul Romanowski: During the quarter, we continued to sell homes later in the construction cycle to better ensure the certainty of the home close date and mortgage rate for our home buyers with almost no sales occurring prior to start of home construction. Our cancellation rate for the first quarter was 27%, down from 32% sequentially, but still elevated from our typical. Our net sales orders in the first quarter decreased 38% to 13,382 homes, and our order value decreased 40% from the prior year to $4.9 million. Our average number of active selling communities increased 4% from the prior year quarter and was down 1% sequentially. The average sales price of net sales orders in the first quarter was $367,900, down 4% from the prior year quarter.

We are continuing to offer mortgage interest rate locks and buy-downs and other incentives to drive traffic to our communities, and we are reducing home prices where necessary to optimize the returns on our inventory investments. Our second quarter sales volume will depend on the strength of its spring selling season, and we currently expect significantly higher levels of net sales orders in the second quarter as compared to the first quarter based on historical seasonal trends, current market conditions and our inventory of completed homes available for sale. Bill?

Bill Wheat: Our gross profit margin on home sales revenues in the first quarter was 23.9%, down 440 basis points sequentially from the September quarter. On a per square foot basis, home sales revenues were down 4% sequentially, stick-and-brick cost per square foot increased 2% and lock costs were flat. The decrease in our gross margin from September to December was in line with our expectations and reflects the increased construction costs we incurred during 2022, along with higher sales incentives and home price reductions. We expect both our average sales price and home sales gross margin to decrease further in our second quarter for fiscal 2023. We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts. We are making progress in these efforts, but we do not expect to see much benefit from lower costs on homes closed in fiscal 2023. Jessica?

Jessica Hansen: In the first quarter, our homebuilding SG&A expenses increased by 6% from last year and homebuilding SG&A expense as a percentage of revenues was 7.8%, up 30 basis points from the same quarter in the prior year. We are controlling our SG&A during this market transition while ensuring our platform adequately supports our business. Paul?

Paul Romanowski: We slightly increased our home starts from the last quarter to 13,900 homes and ended the quarter with 43,200 homes in inventory, down 21% from a year-ago and down 7% sequentially. 27,800 of our homes at December 31 were unsold, of which 7,100 were completed. We are focused on improving our housing inventory turnover. With more completed homes not available for sale, we expect our mix of homes sold and closed in the same quarter to increase back towards our normal historical levels. For homes we closed this quarter, our construction cycle time fully increased by a few days compared to fourth quarter, which reflects lingering supply chain issues. However, we are seeing some stabilization in cycle times on homes that we have recently started and we expect the cycle times to improve during fiscal 2023. We will continue to evaluate demand and adjust our homes and inventory and start pace based on current market conditions. Mike?

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Mike Murray: Our home building lot position at December 31st consisted of approximately 551,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. Our total homebuilding loss position decreased by 22,000 lots from September to December. 32% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchased them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. We continually underwrite all of our lot and land purchases based on future expected home prices and cost. We are actively managing our investments in lots, land, land and development based on current market conditions. During the quarter, our homebuilding segment incurred $4.8 million of inventory impairments and wrote off $19.4 million of option deposits and due diligence costs related to land and lot purchase contracts.

We expect our level of option cost write-offs remain elevated in fiscal 2023 as we manage our lot portfolio. Our first quarter home building investments in lots, land, and development totaled $1.7 billion, down 21% from the prior year quarter and up 16% sequentially. Our current quarter investments consisted of $900 million for finished lots, $690 million for land development, and $130 million to acquire land. Bill?

Bill Wheat: Financial services pre-tax income in the first quarter was $18.2 million on $137 million of revenues with a pre-tax profit conversion of 13.3%. The lower profitability of our financial services business this quarter was primarily due to lower gains on sales and mortgages, increased competitive conditions, and a lower volume of interest rate lots by homebuyers during the December quarter. We expect our financial services to pre-tax profit margin for fiscal 2023 to be higher than the first quarter, but lower than the full year of fiscal 2022. During the first quarter, 99% from mortgage company’s loan originations related to homes closed to buyer home building operations and our mortgage company handled the financing for 77% of our homebuyers.

FHA and VA loans are accounted for 45% of the mortgage company’s volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 7.2 and an average loan-to-value ratio of 88%. First-time home buyers represented 55% of the closings handled by our mortgage company this quarter. Mike?

Mike Murray: Our rental operations generated $328 million of revenues during the first quarter from the sale of 694 single-family rental homes and 300 multi-family rental units, earning pre-tax income of $110 million. Our rental property inventory at December 31st was $2.9 billion, which included approximately $1.9 billion of single-family rental properties and $1 billion of multi-family rental properties. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform matures and expands across more markets. For the second quarter, we currently expect no multifamily rental sales and to close fewer single-family rental homes than in the first quarter. Paul?

Paul Romanowski: Forestar, our majority-owned residential lot development company reported total revenues of $216.7 million on 2,263 lots sold and pre-tax income of $27.9 million for the first quarter. Forestar’s owned and controlled lot position at December 31st was 82,300 lots. 57% of Forestar’s owned lots are under contract with or subject to a right of first offer to D.R. Horton. $190 million of our finished lots purchased in the first quarter were from Forestar. Forestar is separately capitalized from D.R. Horton and had more than $580 million of liquidity at quarter end with a net debt-to-capital ratio of 28.7%. Forestar is well-positioned to meet the current challenging market conditions with its strong capitalization, lot supply and relationship with D.R. Horton. Bill?

Bill Wheat: Our balanced capital approach focuses on being disciplined, flexible and opportunistic. We are committed to maintaining a strong balance sheet with low leverage and significant liquidity to provide a firm foundation for our operated platforms during changes in market conditions and to support our ability to provide consistent returns to our shareholders. During the first three months of the year, our cash provided by homebuilding operations was $313.9 million, and our consolidated cash provided by operations was $829.1 million. At December 31st, we had $4 billion of homebuilding liquidity, consisting of $2 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.

Our liquidity provides significant flexibility to adjust to changing market conditions. Our homebuilding leverage was 12.8% at the end of December, and homebuilding leverage net of cash was 4.4%. Our consolidated leverage at December 31st was 22% and consolidated leverage net of cash was 13.3%. At December 31st, our stockholders’ equity was $20.2 billion and book value per share was $58.71, up 33% from a year ago. For the trailing 12 months ended December, our return on equity was 31.5%. During the quarter, we paid cash dividends of $86.1 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in February. During the quarter, we repurchased 1.4 million shares of common stock for $118.1 million. Jessica?

Jessica Hansen: As we look forward, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets and general economic conditions that may significantly impact our business. We are providing detailed guidance for the second quarter as is our standard practice, but it is still too early to know what housing market conditions will be during the height of the spring selling season, so we are not providing specific guidance for the full year yet. We currently expect to generate consolidated revenues in our March quarter of $6.3 billion to $6.7 billion and homes closed by our homebuilding operations to be in the range of 16,000 to 17,000 homes. We expect our home sales gross margin in the second quarter to be approximately 20% to 21% and homebuilding SG&A as a percentage of revenues in the second quarter to be approximately 8% to 8.3%.

We anticipate a financial services pre-tax profit margin of around 20%, and we expect our income tax rate to be approximately 23.5% to 24% in the second quarter. We are well positioned to aggregate market share in both our homebuilding and rental operations. Our goal remains to generate consolidated revenues in fiscal 2023 or slightly higher than fiscal 2022. However, it is realistic to expect that our full year revenues will decline year-over-year, given the environment and pricing actions we are taking. The low end of our current range of expectations includes consolidated revenues down from fiscal 2022 by a mid-teens percentage, which is unchanged from last quarter. We forecast an income tax rate for the year of approximately 23.5% to 24%.

We expect to generate increased cash flow from our homebuilding operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022. We also plan to repurchase shares at a similar dollar amount as last year to reduce our share count during this year with the volume of our repurchases dependent on cash flow, liquidity, market conditions and our investment opportunities. We have $700 million of senior notes that matured during the remainder of fiscal 2023, which we are currently preparing to repay from cash. We plan to continue to balance our cash flow utilization priorities among our core homebuilding operations, our rental operations, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend and consistently repurchasing shares.

David?

David Auld: In closing, our results and positions reflect our experienced teams, industry-leading market share, broad geographic footprint and diverse product offerings. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and continue aggregating market share. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your focus and hard work. We are incredibly well positioned to continue improving our operations in providing homeownership opportunities to more American families. This concludes our prepared remarks. We will now host questions.

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Q&A Session

Operator: Thank you. The floor is now open for questions. And the first question is coming from Carl Reichardt from BTIG. Carl, your line is live. You may go ahead.

Carl Reichardt: Thanks. Good morning, everybody. I just want to ask about inventory, unsold inventory. So about two-thirds of the inventory that you’ve got now is unsold. I think normally, it’s about half when I went back and looked, so I just want to make sure, should we be optimistic because you’ve got product ready to go for the spring or in the supply chain perhaps is normalizing a little which is allowing you to get that ready or should we be more pessimistic because you haven’t necessarily price that inventory to move yet? That’s my first question.

David Auld: Well, Carl as you know, I’m always optimistic. We feel very good about our inventory position. And you know, through the through the last three, four quarters we limited sales to better align inventory cost demand and our ability to deliver. We are now positioned more in what I would consider a normalized inventory position and again, feel very good about our position and where we’re heading into this quarter.

Mike Murray: Normally coming into the spring selling season, we’d be a little heavier than our normal 50% spec ratio. But feel really good about what we have in front of us right now for demand.

Carl Reichardt: Okay. And then — I was looking at the market count now we’re about 109 markets and say four years ago, I think you were about 80 or so, that’s a lot. And obviously you all benefited post-COVID by entering a lot of smaller markets that saw a fair amount of demand, post the pandemic. Now that that wave is potentially crested, can you talk about how some of the new, especially, the smaller what I call the tertiary city markets are performing over the course of the last six months? Are they better than then some of the major markets less competitors, or is that growth beginning to wane now that we’ve seen a little more return to office back to the large cities? Thanks guys.

Paul Romanowski: Carl, we’ve seen these newer markets and secondary markets performing well for us due to limited competition in those markets. We certainly saw a strong push to all the secondary markets with a pandemic moving people making them more mobile that we’ve been happy with the progression in the secondary markets and glad that we entered them.

David Auld: Yeah Carl. Even before the pandemic, we did very well in the small markets. And ultimately, it comes back to SG&A and control and the ability to deliver houses incrementally add a competitive advantage to what anybody else out there is able to do. So, that that’s been a part of our program and I think you’re going to see continue to be a part of our program.

Carl Reichardt: Thanks, David.

Operator: Thank you. And the next question is coming from Matthew Bouley from Barclays. Matthew, your line is live.