Michael Murray: The strategic value of the platform for us to be a very good multifamily developer is significant as a land user. Being a residential developer, we’ve done that for a long time. And now going into the multifamily development side, we become a better buyer of land parcels and a better partner for land sellers. And so, strategically, it’s a business we’re going to stay in, going to continue to scale that business, but we will be opportunistic and responsive to market conditions with what we do.
Operator: Your next question is coming from Jade Rahmani from KBW.
Jade Rahmani: Not sure if this was stated earlier, but could you get the percentage of your buyers that are taking some kind of mortgage buy down or interest rate incentive? And secondly, what percentage are taking the full-term buy down?
Paul Romanowski: It’s about 60% of our buyers are utilizing some type of rate buy-down and a fair chunk of those – I don’t have specific numbers – almost all are permanent 30-year buy-down.
Jade Rahmani: On the rental business, could you talk to a rough ballpark of exit cap rates that – or acquisition cap rates that the purchases of your development assets are looking to achieve?
Michael Murray: Sort of be across the board. It’s going to vary significantly by market and what the interest rate environment was at the time we made the acquisition. So it’s hard to pin it down to any one cap rate or even a relevant range. Because like with many expectations over the life of the project, from cost and rental side, there’s a lot of actuals prove different than the assumptions we made that come out. And so, fortunately, we’ve been able to see some really strong execution by the teams and picking good projects and executing well on those projects, and that’s showing up in the results. And we’re just going to try to keep working in that direction. But it’s hard for me to give you a number of what a ballpark cap rate was at the time we did a pro forma on a deal and when we decided to go forward with it.
Paul Romanowski: And we have been very conservative in our underwriting and expectations for our single-family rental business and making sure that we feel good about it as a for-sale position as well as a for-rent, and underwriting it to the lowest of those guidelines for our operators, so that we aren’t stretching on cap rates that are all driven potentially by interest environment.
Operator: And our final question this morning is coming from Mike Dahl from RBC Capital Markets.
Michael Dahl: Congrats, Paul. Congrats, David. I wanted to ask a follow-up about margin, and I appreciate you’re not giving full guidance and you’re thinking about returns, not margins, but some of the qualitative comments around expectations for maybe a little bit of downward pressure on price, obviously, some potential just mix, outright price pressure, then the added incentives, the lot costs, it sounds like you’re bracing for further margin declines beyond 1Q. Is that fair? Or is there any order of magnitude that you can help us with on some of the other moving pieces that you’re contemplating around margins beyond 1Q?
Jessica Hansen: I probably wouldn’t use the word bracing for. We feel like we’re in a very strong financial position to weather whatever we find in front of us, whether it’s upside or downside. And we’re going to do what we always do, which is continue to adjust to market conditions. We’re not in a position to give a full-year guide. We likely may never do that again because margin really is a function of market conditions, and we’re going to meet the market week in and week out. And we haven’t seen the spring yet, which is the biggest driver of our full-year margin and where we land for the year in terms of gross margins, obviously. So as you alluded to, there are a lot of moving pieces and a lot of that’s going to be dependent on what happens in the spring.
But if we do find ourselves in a market where we have more downward house price pressure, then we’ll also be looking to adjust our cost structure at the same time. In a typical downward house price market, we do have the ability to adjust our cost structure, not in perfectly real time, but we’re not going to sit there in a vacuum and just reduce home prices and not adjust the other components that go into our business. So we feel very good. Like I said earlier, where we’re starting from, a 25.1% exit rate in Q4 to weather whatever the year looks like and to continue to maximize returns.
David Auld: Mike, I’m pretty optimistic. We’ve never been positioned to execute from a product location, lot supply and have gained efficiency through the last two or three years that I think we’ll continue on. So I think 2024 is going to be a good year given a lack of some catastrophic event. So it’s just – ultimately, in this business, it’s about who can produce houses the most efficient at the lower cost and drive the best returns. And we have never been positioned as a company to do that better than we are right now.
Michael Dahl: No, it’s certainly a strong starting point. And then relatedly, just the cash flow strength is also continuing to be unique in this cycle. The $3 billion in cash from homebuilding ops, for the last couple of years, you’ve had some offsets from the accelerated multifamily or rental operations, some other assets. In the current environment, given what you’ve already articulated on multifamily, I know you still have a big backlog of under construction, but when we’re trying to bridge that cash flow from homebuilding ops down to kind of a true free cash number, anything that we should be thinking about in terms of potential offsets from rentals or other parts of your business? Or do you think the majority of that will actually flow through to free cash?
Bill Wheat: As we did comment earlier, our pipeline of multifamily deals is growing, and we expect higher deliveries on multifamily. So I do expect our investments on the multifamily side of rental to show an increase in fiscal 2024. The single-family side, I think, is uncertain as to whether that will grow or not. It’s going to – we’re evaluating that in market conditions and where the rate environment is, as Mike and Paul commented earlier, but do expect some offset on the multifamily side.
Michael Murray: Within the build-to-rent portfolio, we have a lot of optionality at various points in the development phases of those projects. As we start development, as we plan, vertical product, start construction, and then decide at the point we’re ready with homes, do we go to rent or go to lease, go to rent or go to sale on those, so we can respond almost in real time to what the market is and not take a long duration risk on that asset.
Operator: Thank you. This does conclude today’s Q&A session. I would now like to hand the floor back to Paul Romanowski for closing remarks.
Paul Romanowski: Thanks, Tom. We appreciate everyone’s time on the call today and look forward to speaking with you again in January to share our first quarter results. I would like to thank David for his leadership, guidance, and support throughout my career. Our company has produced remarkable results during his tenure as CEO, and he has positioned us for continued success. To the D.R. Horton team, thank you for your incredible efforts in fiscal 2023. We are well-positioned heading into the new year, and I look forward to everything we will accomplish together in fiscal 2024.
Operator: Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
