Good morning. And welcome to the Second Quarter 2021 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. An interactive question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to your host, Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you. You may begin.

Thank you, Melissa. And good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2021. Before we get started, today’s call may include comments that constitute 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 issues 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’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. The D.R. Horton team delivered a strong second quarter, highlighted by a 95% increase in earnings to $2.53 per diluted share. Our consolidated pre-tax income increased 90% on a 43% increase in revenues to $6.4 billion, and our pre-tax profit margin improved 450 basis points to 18.3%. Our net sales orders for the quarter increased 35% to 27,059 homes, and our homes in inventory increased 38% to 46,100. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 31.2%, and our consolidated return on equity for the same period was 27.1%. These results reflect our experienced teams and expanding production capabilities, our ability to leverage D.R. Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands. Housing market conditions remain very robust, and we are focused on maximizing returns and capital efficiency in each of our communities while increasing D.R. Horton’s market share. We believe our strong balance sheet, liquidity, and low leverage positions us very well 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 and managing our product offerings, incentives, home pricing, sales pace, and inventory levels to optimize the return on our inventory investments. Mike?

Earnings for the second quarter of fiscal 2021 increased 95% to $2.53 per diluted share compared to $1.30 per share in the prior year quarter. Net income for the quarter increased 93% to $930 million compared to $483 million. Our second quarter home sales revenues increased 41% to $6.2 billion on 19,701 homes closed, up from $4.4 billion on 14,539 homes closed in the prior year. Our average closing price for the quarter was up 4% from the prior year at $313,200 and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable. Bill?

Net sales orders in the second quarter increased 35% to 27,059 homes, and the value of those orders was $8.8 billion, up 47% from $6 billion in the prior year. We sold over 14,200 more homes in the first half of fiscal 2021 than the same period last year, supporting further gains in market share and scale. Our average number of active selling communities increased 4% from the prior year quarter and was flat sequentially. Our average sales price on net sales orders in the second quarter was $327,000, up 9% from the prior year. The cancellation rate for the second quarter was 15%, down from 19% in the prior year quarter. Our local teams are managing the sales order pace in each of their communities based on their lot position, number of homes in inventory, and pace of home starts and production. Their increasing sales prices were supported by the market, while remaining focused on providing homes at affordable prices. We are pleased with our sales pace to date in April and remain well-positioned in this strong market with our affordable product offerings, lot supply, and housing inventories. Jessica?

Our gross profit margin on home sales revenue in the second quarter was 24.6%, up 50 basis points sequentially from the December quarter. The increase in our gross margin from December to March exceeded our expectations and reflects the broad strength of the housing market across our footprint. The strong demand for a limited supply of homes has allowed us to raise prices or lower the level of sales incentives in most of our communities. On a per square foot basis, our revenues were up 3.5% sequentially, while our stick-and-brick cost per square foot increased 4.5% and our lot costs increased 2%. We expect both our construction and lot costs will continue to increase on a per square foot basis. However, with the strength of today’s conditions, we expect to offset these cost pressures with price increases. We currently expect our home sales gross margin in the third quarter to be similar to or slightly better than the second quarter. We remain focused on managing the pricing, incentives, and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand. Bill?

In the second quarter, homebuilding SG&A expense as a percentage of revenues was 7.6%, down 70 basis points from 8.3% in the prior year quarter. The improvement in our SG&A ratio this quarter was better than our expectations and was due to our higher-than-expected volume of homes closed and the increase in our average selling price. Our homebuilding SG&A expense as a percentage of revenues is at its lowest point in the March quarter in our history, and we remain focused on controlling our SG&A, while ensuring that our infrastructure appropriately supports our business. Mike?

We have increased our housing inventory in response to the strength of demand. We started 23,700 homes this quarter, up 33% from the second quarter last year and ended the quarter with 46,100 homes in inventory, up 38% from a year ago. 12,200 of our total homes at March 31 were unsold, of which 700 were completed. We also had 1,900 model homes at the end of the quarter. At March 31, our homebuilding lot position consisted of approximately 487,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 26% of our total owned finished lots - owned lots are finished and at least 45% of our controlled lots are or will be finished when we purchase them. Our growing and capital-efficient lot portfolio is key to our strong competitive position, allowing us to increase our production volume to meet homebuyer demand. David?

Our second quarter homebuilding investments, and lots, land development totaled $1.7 billion, of which $980 million was for finished lots, $440 million was for land development and $290 million was to acquire land. $270 million of our lot purchases in the second quarter were from Forestar. Bill?

Forestar, our majority-owned subsidiary, is a publicly traded residential lot manufacturer, operating in 54 markets across 22 states. Our strategic relationship with Forestar, as a well-capitalized lot supplier across much of our operating footprint, is serving us well and is presenting opportunities for both companies to gain market share. Forestar is delivering on its high growth expectations, and now expects to grow its lot deliveries by 40% to 45% in fiscal 2021 to a range of 14,500 to 15,000 lots, with a pre-tax profit margin of 10% to 10.5%. At March 31st, Forestar’s lot position increased 62% from a year ago to 84,500 lots, of which 58,700 are owned and 25,800 are controlled through purchase contracts. 63% of Forestar’s owned lots are under contract with D.R. Horton or subject to a right of first offer under our Master Supply Agreement. Forestar is separately capitalized from D.R. Horton and had approximately $500 million of liquidity at quarter end, which included $170 million of unrestricted cash and $330 million of available capacity on its revolving credit facility. At March 31st, Forestar’s net debt-to-capital ratio was 34.1%. Forestar has been active in the public capital markets recently, issuing common stock through its at-the-market equity offering program, issuing new senior unsecured notes, calling for redemption of some of its higher coupon senior notes and extending the maturity and increasing the capacity of its revolving credit facility. With low leverage, strong liquidity, capital markets access and its relationship with D.R. Horton, Forestar is in a great position to continue to grow their profitable business. Jessica?

Financial services pre-tax income in the second quarter was $107.7 million, with a pre-tax profit margin of 47.8% compared to $24.7 million and 23.6% in the prior year quarter. The improvement in our financial services operating margin is primarily due to strong net gains on sale and better G&A leverage due to increased loan volume. For the quarter, 98% of our mortgage company’s loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 67% of our home buyers. FHA and VA loans accounted for 47% of the mortgage company’s volume. Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 720 and an average loan-to-value ratio of 90%. First-time homebuyers represented 57% of the closings handled by our mortgage company in the quarter. Mike?

At March 31st, our multifamily rental operations had eight projects under active construction and an additional four projects that are completed and in the lease-up phase. Based on our pace of leasing activity, we expect to sell two of these projects during the second half of fiscal 2021. Our multifamily rental assets totaled $394.4 million at March 31st. As we’ve mentioned, we are now constructing and leasing homes within single-family rental communities. After these rental communities are constructed and achieved a stabilized level of leased occupancy, each community is expected to be marketed for sale. Our single-family rental operations are currently reported in our homebuilding segment. There were no sales of single-family rental communities during the second quarter. However, we still expect one more sale later this fiscal year. At March 31st, our homebuilding fixed assets included $182.6 million of assets related to our single-family rental platform, representing 27 communities, up from 13 communities in the first quarter. We now expect our total investments in our single and multifamily rental platforms will increase between $400 million and $500 million from the beginning to the end of fiscal 2021. Bill?

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the six months ended March, our cash provided by homebuilding operations was $138 million compared to $52 million in the prior year period. $215 million of cash provided by our homebuilding operations was due to a deferral of estimated tax payments granted by the IRS as a result of the Texas winter storm this year, and the cash flow impact of this item will reverse in our third quarter. At March 31st, we had $3.7 billion of homebuilding liquidity, consisting of $1.9 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our revolving credit facilities. We plan to continue maintaining higher homebuilding cash balances and liquidity than in prior years to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions. Our homebuilding leverage was 16.8% at the end of March, with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months. At March 31st, our stockholder’s equity was $13 billion and book value per share was $35.96, up 25% from a year ago. For the trailing 12 months ended March, our return on equity was 27.1% compared to 19.1% a year ago. During the quarter, we paid cash dividends of $72.7 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 4.5 million shares of common stock for $350.4 million during the quarter, and the remaining outstanding share repurchase authorization at March 31st was $115.1 million. This week, our Board of Directors authorized a new $1 billion stock repurchase authorization replacing the company’s previous authorization. The new authorization has no expiration date. We are 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. Jessica?

In the third quarter of fiscal 2021, based on today’s market conditions, we expect to generate consolidated revenues of $7 billion to $7.2 billion and our homes closed to be in a range between 21,500 and 22,000 homes. We expect our home sales gross margin in the third quarter to be in the range of 24.6% to 25%, and our homebuilding SG&A as a percentage of revenues in the third quarter to be approximately 7.5%. We anticipate a financial services pre-tax profit margin of approximately 45%, and we expect our income tax rate to be in the range of 22% to 23% for the quarter. For the full fiscal year of 2021, we now expect consolidated revenues of $26.8 billion to $27.5 billion and to close between 82,500 and 84,500 homes. We still expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for our homebuilding cash flow this year, as we prioritize augmenting our housing and land and lot inventories to support higher demand. After reinvesting in our homebuilding business, our cash flow priorities are balanced among increasing our investment in both our multi and single-family rental platforms, maintaining our conservative homebuilding leverage and strong liquidity, paying dividends, and repurchasing shares to reduce our outstanding share count by approximately 1.5% from the beginning of fiscal 2021. David?

In closing, our results reflect our experienced teams and expanding production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands. Our strong balance sheet, liquidity and low leverage provide us with significant financial flexibility to capitalize on today’s robust market and to effectively operate in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of our 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. Your efforts continue to be remarkable. We are incredibly well-positioned to continue growing and improving our operations. This concludes our prepared remarks. We will now host questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of John Lovallo with Bank of America. Please proceed with your question.

Hey, guys. Thank you for taking my question. First one, I guess, it really seems like the asset-light strategy that you guys embarked upon a few years ago is really hitting stride now. I mean, option percentage up to close to 75%, and buybacks now expected to actually lower the share count. So these are all things that we had hoped for some time, and again, it really seems to be hitting stride. Two questions on that. I mean where do you now see sort of the target percent option? I know it can fluctuate quarter-to-quarter, but any change in the view longer term on that? And then, has the view now on buybacks, has that changed? Do you think that you'll actually be able to continue chipping away at the share count over time?

John, I'd say we're always going to try to get better and continue pushing the auction as a percentage of total. We consider that a better utilization cap. So if we're at 75% now, over time, we would expect to turn that into 80%, and we'll get to 80% over time. Under different market conditions, it could grow beyond that. So it's just – you know, like every time we do, we talk about sustainable, scalable, and that follows right on track. We believe that auctioning lots will drive better cash flow, better returns to our shareholders, and as our builders on our platforms execute that strategy, relationships grow stronger, and there’s just a momentum that I think will continue.

And then John, with respect to share repurchases, I would use the word sustainable as well there. As we have progressed in our capital light strategy, as we’ve generated more cash flow, as we have gotten in position with our scale to reinvest in our business to support the scale that we believe the market will bear today. And we’ve improved our balance sheet and our liquidity position. We are now in a position where I do think we have hit an inflection point where I think we can more definitively talk about consistently repurchasing shares and consistently reducing our share count over time. And so, we had a little bit of interruption with COVID last year in which we paused. We reinstated share repurchase last quarter and then this quarter, we’ve accelerated. And now with the new authorization, we are more definitively stating that we expect to consistently reduce our share count each year going forward, and that will be part of our balanced program.

Yeah. That’s really encouraging on both fronts, guys. The second question is, we have heard through the channel of what I would characterize as maybe seemingly aggressive behavior by some of your competitors in terms of whether it’s prices being paid for land, potentially even cutting some corners to get homes closed. Just curious, if you guys have heard any rumblings like this in the market? And if so, I mean, does it maybe suggest that things are getting a little bit too heavy overall?

Yeah. John, we’ve seen on a very limited basis some erratic behavior on the land front, where a builder has positioned themselves where they just don’t have adequate or even non-adequate supply of lots, they are buying out of desperation. But it hasn’t been consistent across all the markets and even within markets where I have seen it, it’s not impactful to the overall land valuation. You know, our entire process through this cycle has been to auction lots, take longer positions where we control pricing through this market, and I think we said on every call, we are incredibly well-positioned on our lot supply. And if somebody is being erratic, then they’re going to be in a very difficult position to compete if they’re overbidding land price, because we are we’re pretty efficient in delivering houses, and our land pipeline is long and deep and very well priced.

John, back to your other question about closing homes before they’re ready. We’ve been in this business a long time and certainly have kind of learned a lesson that we don’t want to close the home before it's time. So we will wait until the home is ready, and the buyer is satisfied with the home to be in there. At the same time, buyers are very anxious to get in their homes. Build times have elongated a bit with supply chain disruptions and some of the labor availability. Our production process, our consistent cadence of starts helps us overcome a lot of that. Selling homes after we’ve started them in their production cycle gives us more assurance of a completion date, and we’re able to better work with the buyers on matching that completion and closing date, aligning with what they need to move in for whatever situation they’re coming from. So keeping that buyer happy through the process, and most importantly, that day, they move in their house, they’re very happy with the completed D.R. Horton home that they’ve just purchased.

It’s really helpful. Thanks, guys.

Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hey. Good morning, everyone. Congrats on the results and thanks for taking the questions. I wanted to ask a question about the revenue guidance, and it’s entirely possible I missed it, but just to the extent you are raising the full-year revenue guide by about, I guess, $1.7 billion at the midpoint, but delivery is up about 2,500 at the midpoint, it seems like there is a lot more revenue there than would be implied by the deliveries. Just what else is driving that uptick? Thank you.

Yeah. Thanks, Matt. With the sales price increases that we have seen in recent quarters, with the sales price increase we’ve seen in our net sales orders this quarter, we are anticipating a further increase in our closing average prices in Q3 and Q4 versus where we’ve been in the first two quarters. So there is some expectation and visibility to increase sales prices in that revenue guide. As well, our total consolidated revenues do include our financial services revenues as well, and we’re seeing very strong net gain performance there. And so there is probably a bit more contribution from that segment of our business into the consolidated revenue guide as well.

Okay. Perfect. Thank you. Second one, I wanted to ask about the administration’s first-time buyer plan that was laid out the other day. It’s obviously much more, I guess, surgically targeted than the broad plan that was initially presented. But do you have any insight into what portion of your buyers might qualify under this down payment plan as it was laid out? Thank you.

I don’t have a percentage to share with you, Matt. Honestly, we haven’t spent a whole lot of time on that to date. I do think it’s a narrower target than what was initially proposed. And so I don’t know that we expect it to move the needle a whole lot. Honestly, the market strength today is extremely robust, and we don’t really need anything to increase demand further or put more pressure on home prices, which is ultimately what more buyers, with a limited supply in the market, can drive. So we’re going to continue to maintain our focus on affordability, and I’m sure our mortgage company will be focused on what we need to do on that front. And we’ll support those buyers as they come into our sales offices, if that is something they can take advantage of, but we don’t expect that to be a big impact overall.

Got it. Understood. Thanks, everyone.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Hi, thanks. Good morning and thanks for taking my question. First, I just wanted to drill down a little bit on the increase of closings guidance, which I think is really noteworthy given all the concerns around the supply chain and the well-publicized limitations around different parts of the supply chain, et cetera, that we’ve all heard about. Maybe you can kind of walk through if there are specific efforts that you’ve kind of put into place that give you the better visibility for that in the back half? And certainly also the increase in closings is much higher than the beat that you had in the second quarter itself. So, I was hoping you could kind of talk to what’s driving that increased guidance? If it’s perhaps some improved efficiencies in the field? If it’s better supply chain arrangements or with certain key providers of either lumber or on the labor side, we would love to hear a little bit more about what's driving that?

Thank you, Michael. What’s giving us confidence from the ability to raise our deliveries guidance has been the starts we’ve been able to get out for the past two, three quarters, frankly, we’ve had very strong home starts, and that’s a result of our teams positioning their operating platforms to be able to have a sustained production cadence in a given neighborhood, in a given submarket. And that’s allowed us to enhance our relationships with a lot of local subcontractors and labor providers in a given market. We're able to give them a consistent and planned full starts program that they can then plan their business back to. On the materials side, there certainly has been, what they call, a Whac-A-Mole game of trying to find the latest thing that we’re out of with our purchasing scale and a lot of our national partners that we’ve been working with, they’ve been really good at helping us get product into homes that we need to close the homes. And those teams have deep relationships with multiple channels in their markets, able to get the components we need to complete the homes. So honestly, our build times have elongated a little bit here lately. It’s not surprising, but we’re very pleased with the progress we’ve made at holding the line and the confidence we have in our production process today to up our guidance for the year and deliver more homes into the strong demand we’re seeing.

No, that’s very helpful. Thanks for that. I guess, secondly, you continue to do very well, obviously, with the sales pace improvements year-over-year. At the same time, you kind of mentioned that you are managing that sales pace with the mind of your capacity on starts. I believe, obviously, your order growth came in a touch below our estimate, but obviously, still extremely strong and the need to make sure sales don’t go too far out, I think, is well understood. How should we think about sales pace in the back half from current quarter levels? Is it something where we should expect more of a flattish type of year-over-year prospect, just given how the business is currently being managed? Or would you see, perhaps, some further upside potential if you are able to further improve your starts capacity?

Sure, Mike. Today, our starts pace and our production pace truly is leading our sales pace, and we’re essentially selling based on that production schedule, as Mike mentioned a few minutes ago. Based on the visibility that we see right now, we think we can continue to expand our capacity and put ourselves in a great position to continue to grow our business into fiscal ‘22 at a double-digit pace. But that being said, the quarterly sales order pace, when you look at the sales order pace last year in Q3 and Q4, we had some very strong levels that are some very strong comps that we’re up against in the back half of the year. So on our normal cadence and in positioning ourselves to grow double-digit next year, our sales order comparables year-over-year in Q3 and Q4 could be in the range of flattish, slightly up, slightly down, but that doesn’t really change the positioning that we’re going to be in, in terms of growing our top line and our bottom line in fiscal ‘21 and positioning ourselves for fiscal 2022.

Great. Great. That’s very helpful. Appreciate it.

Thank you. Our next question comes from the line of Carl Reichardt with BTIG. Please proceed with your question.

Thanks. Good morning, everybody. Thanks for taking my question. I wanted to ask about lot count and how it ties to future community count. I think lot count was up, I think, 48% year-on-year. It’s an enormous increase for a large company. Can you maybe talk about the cadence of how you expect your communities to grow over the next couple or three years based on that significant increase in lot?

I think we’re looking at, what, low single digit community growth goal. I mean when you look at our lot count, a lot of that is option positions that are going to deliver over the next year or two years, and then last for two to three years beyond that. So at the pace these communities are running, we’re looking for 600, 700 lot projects, which doesn’t impact community count, but it does significantly increase lot count when it’s replacing some that’s half that size. So it’s about scale, it’s about driving consistent discipline starts. And demand right now is really good. And so when Bill mentioned that our starts pace is driving our sales pace, I mean, that is the reality. If we could start more houses, we’d be selling more houses. So every month with us, it’s about driving production capability and expanding our start program. And if you look at week-to-week, it’s how we manage it. Our operators out there are doing a great job.

Thanks, David. And then just drilling down back to material cost increases and to tie them to the scale that you have, whether it’s local scale or national scale. If you look at conditions now, David, do you see - can you maybe talk to some specific examples, even of the leverage you’ve been able to get relative to peers on costs or the acquisition of materials if there are shortages? Because it seems to me that’s a - that along with the spec models a pretty important aspect to why you’re continuing to grow as fast as you are despite the size of the company? Thanks.

Carl, it’s a consistent disciplined start program that we’ve been on and managing very effectively, communicating that to our trade base. And so if they have visibility what their work process load is going to be over the next 60, 90 days. And does scale matter? Absolutely, scale matters. And I feel like every month, really, every day, every week, every month, our competitive position, because of our scale, because of our discipline, has just grown. And it’s - we talk about sustainable. It is a great market out there, and I feel like what we’re doing is we have the ability to sustain.

And Carl, in terms of material cost increases, although we have had to take some cost increases, as home prices have continued to rise and our building product partners have been experiencing cost increases in their business, we generally have price protection built in to where we have a cap on what our increase is going to be. So when you see a headline price increase for a product category, generally, what we’re taking is less. It may just be protected in a form of a back-end rebate so we can protect the market price for our partners, but we are generally taking something much less than whatever the overall market increase is.

That’s very helpful. Thanks, guys. Thanks, everybody.

Thanks, Carl.

Thanks, Carl.

Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yeah. Thanks, guys. David, when you were talking about how the market was really good, I was thinking about all the people who are reading the transcript, who are not going to be able to capture - the transcript is not going to capture the emphasis there, it was a shame. I want to ask you guys about production capacity, putting community count growth aside, because everyone is very focused on that. I am focused on the potential for your absorption, you know, unit production per community to increase from here. One way is, obviously, through a mix of communities, bringing on larger communities. I think you referred to that a little bit. Or more entry-level communities, which naturally have a higher level absorption. But I’d also think you could increase production within each type of community, like each supervisor running a little more labor or paying overtime rates or whatever. So what I’m wondering is, as you look at your absorption rates today, how much room is there from here to increase either your mix of higher running communities, higher absorption communities? Or, and I should say, how much ability is there to increase your throughput within each type of community from here, given that your starts are up 34%, I think or so, this past quarter?

Stephen, I think there’s always room to improve, and we’re pushing that mentality out every day. Nothing is good enough. We got to get better. And at our operators and our culture and our company, they’re all competing with each other. And so when you look at the numbers of our divisions, and you think the guy that’s in the 10th or 11th slot, wants to be the number one slot, and so - but to do that, he’s got to get bigger and he’s got to get better. And that drives a very good result for our shareholders. And we talked about absorption as a global deal. It’s really subdivision-by-subdivision, market-by-market. And our improvement in the platform and in what had been our smaller markets, scaling up to become big markets, has been nothing short of phenomenal. I mean, we've got great operators out there that, I think, have a lot of room to scale up, and they’re positioned to do it and we’ve got a market that has really derisked that effort. So I mean, I think our numbers are going to get better, Stephen. I think we’ve got a lot of upside on what we’re doing. And I didn't see the chart of how many markets we're number one in. But last quarter, I think it was 13. I mean, 13 out of 91. I mean, our expectation is we’re going to be number one in every market. So we’ve got a tremendous amount of opportunity to scale up.

We hate to put a goal or try to define what the edge of the universe could be because we’d hate to limit it ourselves. I think five years ago, if you look back and told us we’d be doing these absorptions and production capabilities, we’d have been limiting to what we would have said at that time. So as David said, no matter what we’re able to get done, we know we can all do a little bit better and be a little smarter about how we do things.

Yeah. And Stephen, obviously, in the current market with as strong as demand it is, it’s a little different than we’ve seen at other times in the past. It truly is. We can increase absorption if we can increase production capacity and capabilities. So our operators, our construction managers and everyone is looking for how can we continue to expand our starts pace each week, whether that’s finding additional trades or helping our trades be more efficient, so they can do more homes in the same amount of time. So everybody is working to just get a little bit better. And we’ve consistently been growing at a double-digit pace for several years with just a low single-digit community count growth. So we would continue to point you to our lot count as a driver. If we have a finished lot, we’re going to start a home ultimately, and we’re going to sell and close it. And so, that’s really more the driver than thinking about just a community count growth expectation.

Yeah. Absolutely. All right. Upward and onward. Second question relates to kind of affordability. You’re probably getting a lot of questions about affordability, you know, prices are up so much. Isn’t affordability being stretched? I was wondering if you could share with us whether you’re seeing any signs of stress yet at the first-time buyer? And then more sort of holistically, I think that prices that the homebuilders pass through inherently lags the resale market when prices are rising this fast because you all don't sell above asking price, right, whereas in the resale market, most homes are now selling above asking price. And so given the prices in the resale market are up, gosh, pretty close to 20% right now, isn’t it right to think that your prices in your community should be able to rise further from here based simply on the pricing that has already been achieved in the resale market and which obviously, first-time buyers are paying? So I mean I just want to - so one, can you - do you see any stress on the first-time buyer market? And then two, do you agree with me that pricing for builders kind of lags a little bit inherently in this environment?

Yeah. I think we would agree with the latter that pricing may lag a little bit, but we clearly are seeing the ability to continue to push price. Our first-time homebuyer percentage is actually up year-over-year, 57% compared to 53% last year, and we actually saw it tick up to the high 60s for Express. And also an improvement in terms of our first-time buyer percentage just in our D.R. Horton brand. Our FICO scores stayed extremely stable as have our debt-to-income levels. So it’s showing us that the buyer and the consumer is healthy today. And there are still plenty of people out there that can afford to buy a house. That being said, it's something we recognize that could ultimately become an issue. We still have an average sales price that I think is, compared to most people, about $100,000 lower than most of the rest of the public builders. So that puts us in a very strong competitive position to continue to accommodate buyers who really are looking for affordable product offerings.

Excellent. Great. Thanks a lot guys. Good job.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.

Good morning. Just a follow-up on pricing. If it’s possible to generalize, are you seeing price increases among competitors as being steeper than D.R. Horton communities? If so, is it possible to quantify how much, you know, whether that’s 0.5 point or 1 point? Is that continuing to kind of drive your value proposition versus customers? Or do you think that the rate of increases is maybe more in line with some of your large competitors here?

So there’s a lot of variability, as I think David alluded to earlier, market-to-market, community-by-community. But even if you just listen to the other builder conference calls, which I have, generally, they’re talking about higher price increases at a minimum on average versus an individual floor plan than we are in most cases. So I think we do believe that we’re continuing to maintain that competitive advantage by not necessarily pushing price in some communities as much as others. In some communities, I’m sure we're keeping pace with the market if the ability is there to do so.

I’d disagree with Jessica. Our goal isn’t to sell one house, it’s to sell communities. And so we probably are not as aggressive as some of the other builders have been in raising prices. I mean, our margins are great, our returns are phenomenal, but we’re in this for the long haul. And it's - we're not doing anything short term that we don’t think is sustainable over time. So that’s just who we are. We like being affordable. We like being the price point leader. We like competitive advantage. We think that drives more consistent, sustainable results over time, which is how we think about things.

And our lot position and our production capabilities allow us to continue to do what we’re doing from an affordable product offering perspective, whereas other builders don’t have as deep of a lot position as we do in many markets. And they also can’t start as many homes as we can today. So there’s really no need for us to push price as much as some other builders are doing. As David said, our returns have been improving, I think, at or better than the industry as a whole, even while staying affordable.

We do take a long focus to all of this, and we do want to be sustainable and continue to grow our market share. We’re committed to growing our market share. We’re committed to returning capital to shareholders in dividends and share repurchases in a meaningful manner.

Okay. That’s very helpful. And then apologies if I missed this, but did you see any impact either from a sales side or from a cost side from the winter storm in February in Texas and other parts of the country? I mean, from the outside, it doesn’t look like it, but I am just curious what the impact was to your business?

Yeah. I think there were some supply chain disruptions, some of the petrochemical plants on the Gulf Coast probably are creating some ripples. But by and large, our teams in the field did a phenomenal job of working through that, protecting the homes we had in production, as well as trying to make up the delivery days we may have lost to get those homeowners into their homes as quickly as possible.

Okay. That’s helpful. I’ll turn it over.

Thank you.

Thank you. Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys. Good morning. And congrats on the great performance. I’d love to dig a little bit deeper on the price and affordability conversation. And one of the things that really struck me was, it’s pretty amazing. Your average price over the last five or so years has been remarkably consistent, kind of roughly around $300,000. And prices have been going up over the time period, but you guys have obviously been able to offset that through either growing the share of Express or maybe moving a little bit further out into the tertiary submarkets. And it seems like now that price is clearly breaking out of the range up to 330. And I guess the question for you is, how comfortable are you - or how high are you comfortable taking that number? When you think about the lots you’re acquiring today, what those costs look like? What the material costs look like? What the consumer can afford? Is there a benchmark in mind, recognizing that $300,000 seems to have been kind of the unofficial benchmark over the last five years, where that price could go before you start to get a little bit uncomfortable?

Well, the $300,000 price was not the result of any top-down direct approach, it all happened at the subdivision level, the submarket level, and the communities. And we can’t make as good decisions from a centralized basis here, as our teams in the field make multiple times a day, every day of the week and responding to the market conditions, which includes what existing homes were selling for, other new home alternatives a buyer may have, as well as their cost inputs to that process. We work closely with our mortgage partners in the field to understand what the buyers are coming in with in terms of a loan qualification process and have their underwriting, and all of that factors in on a daily and a weekly basis in determining what the home is worth and can trade for at that point in time. So what we're seeing as a result of individual decisions made by people that are very experienced in the field, very close to the customers. And we’re selling homes, we’re delivering homes, we’re originating and delivering mortgages to well-qualified buyers today. So yes - and then that we’re seeing the upside of that is that our aggregate average sales price has increased substantially, both in the deliveries for the quarter and in the new sales for the quarter. But it’s the result of what's actually happening in the marketplace, we have so many model homes and touch points in market and communities, we’re just seeing the result of that rolling up. So you’re seeing a strong consumer, as Jessica mentioned before, that really wants to have a home.

Understood. Got you. And then kind of related on that point because you brought up the feedback from the field, one thing that we hear a lot from builders lately is their share of buyers coming from out of state has really increased pretty dramatically since before the pandemic. I think some analysis we’ve done, that share is roughly doubled from builders we talked to. So I’m curious, A, if you’ve looked at that or quantified the share of your business that buyers are buying from out of state versus where that was pre-COVID? And I guess on the flip side to that, if that were to slow at all, does that put any pressure on affordability, recognizing a lot of people are moving from higher tax states, higher cost states to more affordable markets?

We don’t have anything that we’ve aggregated to track that. Anecdotally, we’ve heard, in my travels, David’s travels, we’ve heard about people relocating into the market. But we also have - when I talk to agents in the models, where your buyers coming from? They are coming from a ZIP code over or a school district over, and they’re looking to get a slightly different home at a different stage in their life or their first home, they’re coming out an apartment in that market. So I hear what you’re saying, Alan, and I understand what a lot of the national numbers have been. We have not necessarily tracked it to give you a quantitative answer here.

And Texas and Florida continue to be our two largest states, and where I think you’ve seen a lot of in-migration and relocation, but that was happening before COVID.

Right.

So I’m not sure that, you know, as a result of the pandemic easing and whatever changes from a work-from-home perspective, that, that really does anything to slow that down because we really think about that trend as having been pre-pandemic and those being very friendly states that generally have more affordable housing, where people have wanted to live and where a lot of businesses have relocated to so their employees can have a good cost of living and find a good quality home at the right price.

And Alan, I’d say the builders that are positioned higher in the price scale probably experienced more of that than we do. I mean ours – we’re selling to people forming housing - housing formations. And I do think a lot of that is just local market buyers, which maybe insulates us somewhat from the people moving back and forth.

Got it. That makes sense. All right, guys. Thanks a lot. Good luck.

Thank you, Alan.

Thank you. Ladies and gentlemen, our final question today comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions. I appreciate all the color. So far the pricing commentary, in particular on a relative basis, tracks with what we’ve been seeing in our work. But I guess the important thing is it’s still very healthy price increases as you’ve alluded to. The question is really about implications for margins. Unless I missed it, you only gave 3Q. But conceptually, when we think about fiscal 4Q or even beyond that, when you look at maybe cost increases continuing to accelerate, but your price increase picking up and some of that flowing through to the P&L more. Would you expect 4Q to be at least similar to 3Q? Would you expect it to be higher? Any other moving pieces we should be thinking about call it two quarters or further out?

Sure, Mike. We really only have the best visibility to wonder out, which is why we’ve stuck to guidance for just Q3 specifically. But clearly, market conditions remained very strong. And we’ve been very pleased with our operators. As you’ve heard us say, every quarter, for several quarters, our gross margins have exceeded our expectations because they’ve done such a great job controlling costs. And we have been able to push through some price to offset some of that costs as well. I think our base case would be if market conditions remain this strong, we’re hopeful that we get enough price to offset any cost increases. And is there potential upside due to continued market strength? Sure. But it’s not something we can sit here and say today about our fourth quarter margins or anything further out, it’s going to continue to be dependent on market strength, affordability and our ability to push through price.

Okay. Got it. Thanks, Jessica. That's helpful. And then my second question is also still affordability-related. Just with the rapid level of increases, I guess, both in existing home market and new home market really across price points. Are you seeing anything from an appraisal standpoint where you are starting to see appraisals lag behind the price increases that have been implemented? Just any color from the field on that?

Sure. You, typically, will see in a rising price environment like we’re in today that the appraisals are often backwards-looking. And it does tend to dampen maybe where it would go. But what you are seeing in our closed loans are homes that have been fully underwritten and appraised meeting appraisal valuations. And so we do hear about it anecdotally. There is oftentimes more education you can provide in that process and more information you can make available that can help with the appraisal process, but it’s not been a significant impediment to the prices that we’re contracting for homes are closing at those prices generally.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.

Hey. Good morning, everyone. Thanks for taking my questions. First, I just wanted to talk a little bit more on the cost increases, especially lumber. Lumber is just really starting to spike here over the past month or so. And I appreciate that, literally, every day, the futures are a moving target. But could you give us a big picture macro overview? Do you think that there’s any relief in sight going forward? Any new sawmills opening? There is a lot of robust demand or do you think this level of lumber pricing is kind of here to stay? And with that, I wanted to follow up on Mike Dahl's question. Do you think there’s enough pricing in the industry to really offset this lumber inflation especially that will probably hit kind of calendar 4Q?

You know, is the lower pricing here to stay? I think a lot of it was driven by mills shutting down during COVID. I do think as they reopen these mills and increase the capacity to deliver wood, you’re going to see some improvement, some - a little less pressure on it. I think opening up international trade may relieve some pressure on it. But right now, to date, the demand is so strong. A lot of people, over the last so many years, deferred buying a house. Now the house has been formed and the kids are coming, and COVID showed that living in an apartment down a metropolitan area may not be the lifestyle you want, so a lot of factors driving demand. I don't know if I answered your question, but it’s complicated.

We continue to have a focus on efficiency. And regardless of what’s going on in the cost environment, we’re trying to become more efficient every day, and we want to be able to put an affordable house on the ground regardless of our input costs. And I think we've proven that our operators and our scale are allowing us to do that, regardless of lumber fluctuations here over the last couple of years. And we’ll see where it's headed. But we adjust to that as necessary and do the best we can to manage those lumber costs as they come through.

Okay. Thank you. And then another one, just on affordability and pricing, I mean, very robust pricing so far this year, especially on a year-over-year basis. And I know a lot of entry-level builders really try to stay below the FHA loan limits within the specific metro. But could you just generally talk about how much wiggle room you have to possibly push pricing going forward before really bumping up against those loan limits appreciating that you’re probably attempting to continue to switch to a smaller square footage?

Yeah, I think Truman that we’re continually looking to make sure we’re affordable to the markets that we serve on a neighborhood-by-neighborhood basis. And we’re seeing that today that we’re not getting any resistance to the pricing that’s coming through. You can just see that by the level of specs that we have. I think 26% of our homes in inventory are unsold today, and probably most of those are fairly recently started. It may not even have been released for sale yet as we’re working our way through the production process. But as we see signs of softening demand, it would be an increase in our completed specs. And right now, those are down, I think, about 700 homes that are completed and unsold today, which is, you know, we probably haven’t been that low since 1992, the time we became public.

That's usually the number at Dallas.

Yeah, usually, in a given market, we may have that many by intention. And so we are - we see very strong demand, and we’re not seeing any resistance yet on the affordability side. Because as we’ve talked about before, we do try to position ourselves as an affordable value choice against the competitive set we have in any market versus other new homes and the compelling buy against existing homes.

Asked another way, are you all comfortable going above the FHA loan limits today, just given how strong demand is?

In some markets, we are. It just adds a risk level to the underwriting…

Okay.

That's one of the things we look at on every project we put under contract. It’s how that stacks against FHA. And if it’s over FHA, it adds to the risks. But are we comfortable doing it? Yes. It depends – it’s all project-driven, market-driven.

All right. Thank you. Good luck on the upcoming quarter.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I’ll turn the floor back to Mr. Auld for final comments.

Thank you, Melissa. 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 for your continued focus and hard work. And I’m going to remind you again, stay humble, stay hungry and stay - and let's close out this year in an unbelievable fashion. Thank you.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.