D.R. Horton, Inc. (NYSE:DHI) Q2 2024 Earnings Call Transcript

D.R. Horton, Inc. (NYSE:DHI) Q2 2024 Earnings Call Transcript April 18, 2024

D.R. Horton, Inc. beats earnings expectations. Reported EPS is $3.54, expectations were $3.09. DHI 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 Second 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] I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Jessica Hansen: Thank you, Tom and good morning. Welcome to our call to discuss our financial results for the second 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 and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

This morning’s earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to Paul Romanowski, our President and CEO.

Paul Romanowski: Thank you, Jessica, and good morning. I’m 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 second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion with a pre-tax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9%, and our return on equity for the same period was 22.2%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable.

Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well-positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving. We continue to focus on capital efficiency to produce consistent, strong homebuilding operating cash flows and returns. Mike?

Michael Murray: Earnings for the second quarter of fiscal 2024 increased 29% to $3.52 per diluted share compared to $2.73 per share in the prior year quarter. Net income for the quarter was $1.2 billion on consolidated revenues of $9.1 billion. Our second quarter home sales revenues increased 14% to $8.5 billion on 22,548 homes closed compared to $7.4 billion on 19,664 homes closed in the prior year. Our average closing price for the quarter was $375,500 flat sequentially and down 1% from the prior year quarter. Bill?

Bill Wheat: Our net sales orders in the second quarter increased 14% to 26,456 homes and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year-over-year. The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term.

Our sales continue to be primarily from homes under construction and completed homes and 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 second quarter was 23.2%, up 30 basis points sequentially from the December quarter. On a per square foot basis, home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot costs increased 3%. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season in addition to changes in mortgage interest rates and other market conditions. For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter. Bill?

Bill Wheat: In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Paul Romanowski: We started 24,900 homes in the March quarter and ended the quarter with 45,000 homes in inventory, up 3% from a year ago and up 6% sequentially. 27,600 of our homes at March 31st were unsold. 7,300 of our total unsold homes were completed, of which 790 had been completed for greater than six months. For homes we closed in the second quarter, our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to complete. We will maintain a sufficient starts pace and homes and inventory to meet demand and continue consolidating market share. Mike?

Michael Murray: Our homebuilding lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development and $230 million for land acquisition. Paul?

Paul Romanowski: In the second quarter, our rental operations generated $33 million of pre-tax income on $371 million of revenues from the sale of 1,109 single-family rental homes and 424 multifamily rental units. Our rental property inventory at March 31st was $3.1 billion, which consisted of $1.3 billion of single-family rental properties and $1.8 billion of multi-family rental properties. We are not providing separate annual guidance for our rental segment 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 revenues in the third quarter to be similar to the second quarter. Jessica?

Jessica Hansen: Forestar, our majority-owned residential lot development company reported revenues of $334 million for the second quarter on 3,289 lots sold with pre-tax income of $59 million. Forestar’s owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar’s owned lots are under contract with or subject to a right of first offer to D.R. Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar. Forestar had approximately $800 million of liquidity at quarter end with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding 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 Murray: Financial services earned $78 million of pre-tax income in the second quarter on $226 million of revenues, resulting in a pre-tax profit margin of 34.6%. During the second quarter, essentially all of our mortgage companies loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 80% of our buyers. FHA and VA loans accounted for 59% of the mortgage company’s volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 89%. First time homebuyers represented 57% of the closings handled by a mortgage company this quarter. Bill?

Bill Wheat: Our balanced capital approach focuses on being disciplined, flexible and opportunistic 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 the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024.

Our consolidated leverage at March 31st was 20% and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders’ equity was $23.8 billion and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31st, our return on equity was 22.2% and our consolidated return on assets was 15.1%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million and our Board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter and our fiscal year-to-date stock repurchases were $801 million. Jessica?

Jessica Hansen: For the third quarter, we currently expect to generate consolidated revenues of $9.5 billion to $9.7 billion and homes closed by our homebuilding operations to be in the range of 23,500 homes to 24,000 homes. We expect our home sales gross margin in the third quarter to be approximately 23% to 23.5% and homebuilding SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pre-tax profit margin of around 30% to 35% in the third quarter, and we expect our quarterly income tax rate to be approximately 24%. Our full year fiscal 2024 revenue, pricing and margins will be affected by market conditions and changes in mortgage rates in addition to our efforts to meet demand by balancing sales pace and price to maximize returns.

For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36.7 billion to $37.7 billion and expect homes closed by our homebuilding operations to be in the range of 89,000 to 91,000 homes. We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations. We now plan to purchase approximately $1.6 billion of our common stock for the full year in addition to our annual dividend payments of around $400 million. Finally, we now expect an income tax rate for fiscal 2024 in the range of 23.5% to 24%. We are 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 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: Thank you. The floor is now opened for questions. [Operator Instructions] And the first question this morning is coming from Carl Reichardt from BTIG. Carl, your line is live. Please go ahead.

Carl Reichardt: Thanks. Good morning, everybody. I wanted to talk about Florida. It’s a pretty important market for you all. The long experience there. We’ve seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there, maybe the various markets within Florida and how it feels to you right now?

Paul Romanowski: You know, Carl, Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So haven’t seen a significant an increase for the homes in the communities where we sell as you may see reported along the coastal and high wind zones. Still seeing good in migration and good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula.

Carl Reichardt: Right. Thanks. And then a follow-up on multi-family and single-family for sale, that portfolio business. With some lumpiness there, I’m curious about the markets where you’ve got fairly good-sized operations in multi-family and single-family rental, one of the reasons for you entering and playing more significantly in that space, I think is scale benefits for the overall homebuilding operations. So if you think about the markets where you’re big in those two businesses, are you seeing lower overall vertical costs for the homebuilding operation too or better margins? And maybe sort of expand a little bit on that particular element of the business? Thanks.

Paul Romanowski: I think there’s two big factors that drive into our push into the rental business. One is, we’re a better buyer of land, a better user of land and that we’re able to convert more of the land to its ultimate final use. So we’re a better counterparty to a lot of sellers as we can deal with the build for rent and multi-family component as well as the residential for sale. That gives us some economies in the purchase of the land and efficiencies in the entitlement process. Certainly within the vertical cost structure, we’ve probably seen more ability to influence cost on the traditional multi-family side coming over from our homebuilding operations because we’re much bigger buyers of parts and pieces that go into the structures than a traditional multi-family developers.

Carl Reichardt: Okay. I appreciate it. Thanks all.

Paul Romanowski: Thank you.

Operator: Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead.

John Lovallo: Good morning, guys, and thank you for taking my questions. The first one, obviously, there’s a lot of concern in the market given the stickier than expected CPI. Although rates — the long-term mortgage rates only moved up by about 35 basis points since pre-CPI. I mean, I guess the question is, have you seen or would you expect to see any impact to demand or would there be any change in your incentive activity given this 35 basis point move in rates?

Paul Romanowski: We expect to continue to meet the market and we continue to stay focused on incentives that drive that activity and interest rate buydowns has been a big portion of what we have done. We tend to move with the market. So as you’ve seen that increase in market rates, we will move up the rate buy downs to be about a point to a point and a half below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today.

John Lovallo: Understood. And maybe splitting gears slightly here, but you guys beat deliveries versus your outlook in the quarter by about 2,300 units at the midpoint, raised the outlook by about 1,500 units at the midpoint. I mean, was there some pull forward in the second quarter or is there some conservatism in this outlook or maybe the expectation that delivery pace could moderate to some extent? I mean, how should we think about that?

Jessica Hansen: Yeah, great question, John. We did go into the quarter with a significant number of completed specs. So we actually sold and closed intra-quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So we still have over 7,000 completed specs. So I do think you’ll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter. But that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000.

And we’re now back to normal, if not better than our historical inventory turns in terms of what we’re guiding to at the high end, it’d be a roughly 2.2 times turn. So feel very good about the ability to take that range up, but don’t think there is necessarily an opportunity for the same scale of beat next quarter.

John Lovallo: Yeah, makes a lot of sense. Thank you guys.

Operator: Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen your line is live. Please go ahead.

Stephen Kim: Thanks very much guys. Strong quarter. I appreciate all the guidance thus far. I was curious if you could shed a little bit more light regarding your cash flow guidance. You mentioned about $3 billion from homebuilding specifically, but you do have other segments, you have the rental segment, and you have Forestar in particular. And I was curious as to what kind of an offset should we expect from rental or Forestar this year relative to that $3 billion from homebuilding? And then specifically with rental, you have about $3.1 billion in inventory value right now. Where do you think that’s going to go over the next, let’s call it, 12 months or so?