D.R. Horton, Inc. (NYSE:DHI) Q1 2024 Earnings Call Transcript

D.R. Horton, Inc. (NYSE:DHI) Q1 2024 Earnings Call Transcript January 23, 2024

D.R. Horton, Inc. misses on earnings expectations. Reported EPS is $2.82 EPS, expectations were $2.88. D.R. Horton, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the First Quarter 2024 Earnings Conference Call for D.R. Horton, America’s Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Jessica Hansen: Thank you, Holly and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2024. 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 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 later this week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under News & Events for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO.

Paul J. Romanowski: Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. For the first quarter the D.R. Horton chain delivered solid results highlighted by earnings of $2.82 per diluted share. Our consolidated pretax income was $1.2 billion on a 6% increase in revenues to $7.7 billion, with a pretax profit margin of 16.1%. Our home building return on inventory for the trailing 12 months ended December 31st was 29% and our return on equity for the same period was 21.8%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 35% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and demographics supporting housing demand remain favorable.

Early signs for the Spring selling season have been encouraging. We will continue to focus on consolidating market share and are well positioned for the Spring with 42,600 homes in inventory and our average construction cycle times returning to more normal levels. We expect our housing inventory terms to improve in fiscal 2024 compared to fiscal 2023 and our ongoing focus on capital efficiency to produce strong home building operating cash flows and consistent returns. Mike?

Michael J. Murray: Earnings for the first quarter of fiscal 2024 increased 2% to $2.82 per diluted share compared to $2.76 per share in the prior year quarter. Net income for the quarter was $947 million on consolidated revenues of $7.7 billion. Our first quarter home sales revenues was $7.3 billion on 19,340 homes closed compared to $6.7 billion on 17,340 homes closed in the prior year. Our average closing price for the quarter was $376,200, down 2% sequentially and down 3% from the prior year quarter. Bill?

Bill W. Wheat: Our net sales orders in the first quarter increased 35% to 18,069 homes, and order value increased 38% from the prior year to $6.8 billion. Our cancellation rate for the quarter was 19%, down from 21% sequentially and down from 27% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 14% year-over-year. The average price of net sales orders in the first quarter was $375,800, down 2% sequentially and up 2% from the prior year quarter. To adjust to changing market conditions during fiscal 2023 and into fiscal 2024, we have increased our use of incentives and reduced home prices and sizes of our home offerings where necessary to provide better affordability to home buyers.

Based on current market conditions, mortgage rates, and continued affordability challenges, we expect our incentive levels to remain elevated in the near-term. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica?

Jessica Hansen: Our gross profit margin on home sales revenues in the first quarter was 22.9%, down 220 basis points sequentially from the September quarter, 100 basis points of the sequential margin decline related to the decrease in the value of hedging instruments we used to offer below market interest rate financing to our home buyers while the remainder was primarily due to an increase in incentive levels on homes closed during the quarter. On a per square foot basis, home sales revenues were down 1.5% in the quarter and lot costs increased 1.5% while stick and brick costs decreased 1%. As Bill mentioned, we expect our incentive levels to remain elevated in the near-term, but with mortgage rates generally declining from the recent highs, we expect our home sales gross margin in the second quarter to be similar to the first quarter.

Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand and other market conditions during the Spring in addition to changes in mortgage interest rates. Bill?

Bill W. Wheat: In the first quarter, our home building SG&A expenses increased by 14% from last year and home building SG&A expense as a percentage of revenues was 8.3%, up 50 basis points from the same quarter in the prior year, due primarily to expansion of our operations to support future growth and an increase in equity and stock market-based compensation expense. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Paul J. Romanowski: We started 19,900 homes in the December quarter and ended the quarter with 42,600 homes in inventory, down 1% from a year ago and up 1% sequentially. 28,800 of our homes at December 31st were unsold. 9,000 of our total unsold homes were completed, of which 730 had been completed for greater than six months. Our current level of homes in inventory puts us in a strong position for the upcoming Spring selling season. For homes we closed in the first quarter, our construction cycle times continued to improve and we are essentially back to our historical average of roughly four months from start to complete. We will continue to adjust our homes and inventory and start space based on market conditions and expect our housing inventory terms to improve in fiscal 2024 as compared to fiscal 2023. Mike?

Michael J. Murray: Our home building lot position at December 31st consisted of approximately 607,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. 39% of our total owned lots are finished and 52% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our first quarter home building investments in lots, land, and development totaled $2.4 billion, up 3% sequentially. Our investments this quarter consisted of $1.4 billion per finished lots, $740 million for land development, and $270 million for land acquisition. Paul?

Paul J. Romanowski: In the first quarter, our rental operations generated $31 million of pre-tax income on $195 million of revenues from the sale of 379 single family rental homes and 300 multifamily rental units. Our rental property inventory at December 31st was $3 billion, which consisted of $1.4 billion of single family rental properties and $1.6 billion of multifamily rental properties. We are not providing separate guidance for our rental segment this year due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental closings and revenues in the second quarter to exceed the first quarter. Jessica?

Jessica Hansen: Forestar, our majority owned residential lot development company, reported revenues of $306 million for the first quarter on 3,150 lots sold with pretax income of $51 million. Forestar’s owned and controlled lot position at December 31st was 82,400 lots. 61% of Forestar’s owned lots are under contract with or subject to a right of first offer to D.R. Horton. $270 million of our finished lots purchased in the first quarter were from Forestar Forestar had more than $840 million of liquidity at quarter end with a net debt to capital ratio of 14.9%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots for the home building industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply, and relationship with D.R. Horton. Mike.

Michael J. Murray: Financial services earned $66 million of pretax income in the first quarter on $193 million of revenues resulting in a pretax profit margin of 34.3%. During the first quarter essentially all of our mortgage company’s loan originations related to homes closed by our home building operations, and our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 57% of the mortgage company’s volume. Borrowers originating loans with DHI Mortgages this quarter had an average FICO score of 724 and an average loan to value ratio of 88%. First time home buyers represented 56% of the closings handled by our mortgage company this quarter. Bill.

Bill W. Wheat: Our balanced capital approach focuses on being disciplined, flexible, and opportunistic to support and to sustain an operating platform that produces consistent returns, growth, and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During the first three months of the year, our consolidated cash used in operations was $153 million. At December 31st, we had $6.4 billion of consolidated liquidity consisting of $3.3 billion of cash and $3.1 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.3 billion with no senior note maturities in fiscal 2024.

Our consolidated leverage at December 31st was 18.6% and consolidated leverage net of cash was 7.8%. At December 31st, our stockholder’s equity was $23.2 billion, and book value per share was $69.70, up 19% from a year ago. For the trailing 12 months ended December, our return on equity was 21.8%, and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of approximately $100 million, and our Board has declared a quarterly dividend at the same level to be paid in February. We repurchased 3.3 million shares of common stock for $398 million during the quarter. Jessica.

Jessica Hansen: Although volatility in mortgage rates and changes in economic conditions could significantly impact our business, for the second quarter we currently expect to generate consolidated revenues of $8.1 billion to $8.3 billion and homes closed by our homebuilding operations to be in the range of 20,000 to 20,500 homes. We expect our home sales gross margin in the second quarter to be approximately 22.6% to 23.1% and home building SG&A as a percentage of revenues to be in the range of 7.5% to 7.7%. We anticipate a financial services pretax profit margin of around 30% to 35% in the second quarter, and we expect our quarterly income tax rate to be approximately 23.5% to 24%. We are well positioned to continue consolidating market share in all of our operations.

Our full year fiscal 2024 revenue, pricing, and margins in our home building, rental, financial services, and Forestar businesses will be determined by market conditions and the strength of the Spring selling season in addition to our efforts to meet demand by balancing pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36 billion to $37.3 billion and expect homes closed by our homebuilding operations to be in the range of 87,000 to 90,000 homes. We expect to generate approximately $3 billion of cash flow from our homebuilding operations. We also plan to repurchase approximately $1.5 billion of our common stock to continue reducing our outstanding share count in addition to annual dividend payments of around $400 million.

Finally, we now expect an income tax rate for fiscal 2024 of approximately 24%. We remain focused on balancing our cash flow utilization priorities to grow our operations, pay an increased dividend and consistently repurchase shares while maintaining strong liquidity and conservative leverage. Paul.

Paul J. Romanowski: In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic footprint, and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow while continuing to aggregate market share. We will 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 family of employees, land developers, trade partners, vendors, and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question for today is coming from Steven Kim with Evercore ISI.

Stephen Kim: Yeah, thanks very much, guys. Appreciate it, and thanks for all your commentary. I guess, just to start off with, could you clarify, I think you mentioned at the beginning of the call about 100 basis points of the gross margin was affected by hedging related to I think you said rate buy downs. And in your guide for 2Q, can you also just clarify like what — I thought I heard you said 20,000 to 20,500 closings and $8.1 billion to $8.3 billion in consolidated revenue, just want to make sure I heard those right?

Jessica Hansen: Yes, Steve, that’s correct. For the second quarter, $8.1 billion to $8.3 billion of consolidated revenues and closing to 20,000 to 20,500 homes. And in terms of home sales gross margin, you’re also correct that 100 basis points of the impact was due to the rate buy downs that we’ve been offering and adjustments we had to make to that position during the quarter on a sequential basis. But what we’ve guided to for Q2 versus Q1 is relatively flat in terms of a 22.6% to 23.1% gross margin in Q2 versus the 22.9% that we posted this quarter.

Stephen Kim: Gotcha. And that 100 basis points, is that something that you have done in the past, is that a number that compares I guess, can you give us some sense of what that number has been over the last couple of quarters?

Bill W. Wheat: Steve, this quarter is the first time that, that amount has been significant at all. It is essentially adjusting the valuation of our hedging positions that we have in place to offer our programmatic rate buy downs across the country, and it’s typically a very small move either up or down. But this quarter, given the significant volatility in rates during the quarter, of course, mortgage rates moved up to 8% in November and then dropped sharply in December, those hedging positions had to be adjusted to reflect that. So it was an unusual situation this quarter. Generally, we don’t plan for any significant move one way or the other.

Jessica Hansen: And if you were to exclude that charge, we would have landed in the gross margin that we had guided to for the quarter, that was really the reason that we came in below.

Stephen Kim: Gotcha. Okay. That’s really helpful. I’m sure there’s going to be more questions about the guide, but I wanted to talk about your capital allocation, and in particular, I guess, I know that the mantra for D.R. Horton over the last several years now has been about consistency and predictability and reliability and that sort of thing, and you’ve done a great job there. But as I think about your overall cash position, it looks like you have sufficient cash. Currently, you’ve got another $3 billion coming. I think maybe a little less than $2 billion is spoken for with buybacks and dividends, I was curious about that extra $1 million and I’m curious how land investment factors into that and rental. So those are the two of the big pieces it would seem.

So I guess, when I look at your land, your land supply has been coming down for — had been coming down for a number of years, but now for about three years, your land and year supply has been flat. I was wondering, do you think you can bring down that land investment down further or is this kind of the level that you think that we’re going to be seeing in the future? And then in rental, can you give us a sense for what you think the growth in the rental inventory may be over the course of the next year?

Michael J. Murray: Steve, when we look at our land position, we feel that the forward one year’s roughly supply of land that we own is important to maintain the production velocity in our neighborhoods. Bringing that down significantly is going to be incremental because it’s going to be with more developers providing finished lots for us versus self-development. And I think we’re back up to 76% controlled which is up from where it’s been in the past few quarters. So we’re going to continue to incrementally look to control more land and acquire lots that are being finished by others, but we will still need to maintain a supply of land on our balance sheet, lots primarily on our balance sheet to feed the production.

Stephen Kim: And the rental inventory?

Michael J. Murray: And the rental inventory, we’ll probably invest in some during fiscal 2024 to grow that platform. It’s getting closer to a good sustainable volume that will produce consistent revenues and profits quarter-to-quarter, but it’s still in the growth mode.

Jessica Hansen: And in terms of the overall capital allocation, as you already alluded to, we did guide to the $1.5 billion of common stock. We’ve got the annual dividend payments of $400 million. We also have a sizable debt maturity that’s very early in fiscal 2025 of $500 million in October. So too early to say what we’re going to do with that, and we’re very focused on maintaining conservative leverage and we’ll see as we get closer, but that is something we’re going to be prepared to potentially pay out of cash if we don’t feel like the market is right to go refi that.