Good morning, and welcome to the Second Quarter 2023 Earnings Conference Call for D.R. Horton Americas 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. Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

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

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice Presidents and Co-Chief Operating Officers; and Bill Wheat, our Executive Vice President and Chief Financial Officer. We are excited to announce that we recently closed our one millionth home, a first for any homebuilder. We are both humbled and proud to have been a part of a million families achieving their dream of home ownership over the past 45 years. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.73 per diluted share. Our consolidated pre-tax income was $1.2 billion on $8 billion in revenues, with a pre-tax profit margin of 15.6%. Our homebuilding return on inventory for the trailing 12 months ended March 31 was 35.1%. And our consolidated return on equity for the same period was 27.2%. Spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter. Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions. Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable. We are well-positioned to navigate changing market conditions with our experienced operators, affordable product offerings, flexible lot supply, and great trade and supplier relationships. Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility. We will continue to focus on managing our product offerings, incentives, home prices, sales pace, and inventory levels to meet the market, consolidate market share, optimize returns, and generate increased operating cash flow. Mike?

Earnings for the second quarter of fiscal 2023 decreased 32% to $2.73 per diluted share compared to $4.03 per share in the prior year quarter. Net income for the quarter decreased 34% to $942 million on consolidated revenues of $8 billion. Our second quarter home sales revenues were $7.4 billion, from 19,664 homes closed compared to $7.5 billion from 19,828 homes closed in the prior year. Our average closing price for the quarter was $378,800, down 2% sequentially and essentially flat with the prior year quarter. Paul?

Our net sales orders in the second quarter decreased 5% to 23,142 homes and order value decreased 11% from the prior year to $8.6 billion. Our cancellation rate for the quarter was 18%, up from 16% in the prior year quarter but down 27% sequentially. Our average number of active selling communities was up 3%, both sequentially and year-over-year. The average sales price of net sales orders in the second quarter was $372,900, down 7% from the prior year quarter and up 1% sequentially. To adjust to the change in market conditions and higher mortgage rates, we have continued offering incentives and reducing the prices and sizes of our homes where necessary to provide better affordability to homebuyers and to optimize the returns on our inventory investments. We expect to continue offering a similar level of incentives throughout 2023, and we are seeing indications that our average sales price and incentive levels are beginning to stabilize. Our sales volume in the third quarter and for the rest of the year will depend on the continued strength of the Spring selling season and general market conditions, which can be significantly affected by changes in mortgage rates and other economic factors. We will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Our gross profit margin on home sales revenues in the second quarter was 21.6%, down 230 basis points sequentially from the December quarter. The decrease in our gross margin from December to March reflects the impact of higher sales incentives and home price reductions. On a per square foot basis, home sales revenues were down 1% sequentially. Stick and brick cost per square foot increased 1% and lot costs were up 5%. We are continuing to work with our trade partners and suppliers to reduce our construction costs on new home starts. We are making some limited progress in these efforts but are also still experiencing some cost increases due to the overall inflationary environment. However, with the benefits of lower lumber costs, the average cost of our homes closed is beginning to stabilize, and we see indications that our home sales gross margin is also starting to stabilize around current levels. Jessica?

In the second quarter, our homebuilding SG&A expenses increased by 8% from last year, and homebuilding SG&A expense as a percentage of revenues was 7.3%, up 50 basis points from the same quarter in the prior year. We are controlling our SG&A while ensuring our platform adequately supports our business. Paul?

We started 19,900 homes this quarter and ended the quarter with 43,600 homes in inventory, down 27% from a year ago and up 1% sequentially. 24,800 of our homes at March 31 were unsold, of which 6,400 were completed. For homes we closed this quarter, our construction cycle time decreased 12 days from the first quarter, reflecting our efforts to improve our cycle times and improvements in the supply chain. We will continue to evaluate demand and adjust our homes and inventory and start pace based on current market conditions. Mike?

Our homebuilding lot position at March 31 consisted of approximately 547,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 32% of our total owned lots are finished and 53% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is key to our strong competitive position. We are actively managing our investments in lots, land, and development based on current market conditions. During the quarter, our homebuilding segment incurred $900,000 of inventory impairments and wrote off $13 million of option deposits and due diligence costs related to land and lot purchase contracts. We expect our level of option cost write-offs to remain somewhat elevated in fiscal 2023 as we continue to manage our lot portfolio through changing market conditions. Our second quarter homebuilding investments in lots, land, and development totaled $1.7 million, down 19% from the prior year quarter and flat sequentially. Our current quarter investments consisted of $980 million for finished lots, $590 million for land development, and $150 million for land acquisition. Bill?

Financial services pretax income in the second quarter was $86 million on $216 million of revenues, with a pretax profit margin of 39.6%. During the second quarter, 99% of our mortgage company's loan originations related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 76% of our buyers. FHA and VA loans accounted for 46% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 723 and an average loan-to-value ratio of 88%. First-time homebuyers represented 55% of the closings handled by our mortgage company this quarter. Mike?

Our rental operations generated $224 million of revenues during the second quarter from the sale of 721 single-family rental homes, earning pretax income of $35 million. Our rental property inventory at March 31 was $3.3 billion, which included approximately $2.1 billion of single-family rental properties and $1.2 billion of multifamily rental properties. We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform matures and expands across more markets. For the third quarter, we expect our rental revenues to be similar to our first and second quarters. Paul?

Forestar, our majority-owned residential lot development company, reported total revenues of $302 million on 2,979 lots sold and pretax income of $36 million for the second quarter. Forestar's owned and controlled lot position at March 31 was 76,400 lots. 54% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $220 million of our finished lots purchased in the second quarter were from Forestar. Forestar is separately capitalized from D.R. Horton and had more than $650 million of liquidity at quarter end with a net debt-to-capital ratio of 25.2%. Forestar is well positioned to meet changing market conditions with its strong capitalization, lot supply, and relationship with D.R. Horton. Bill?

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. We are committed to maintaining a strong balance sheet with low leverage and significant liquidity, which provides us the flexibility to adjust to changing market conditions. During the first six months of the year, our cash provided by both our consolidated and homebuilding operations was $1.5 billion. At March 31, we had $4.4 billion of homebuilding liquidity consisting of $2.4 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility. We repaid $300 million of 4.75% senior notes in February at maturity, and we have $400 million of senior notes that will mature in August. Our homebuilding leverage was 11.5% at the end of March, and homebuilding leverage net of cash was 1.5%. Our consolidated leverage at March 31 was 22.4%, and consolidated leverage net of cash was 12.3%. At March 31, our stockholders' equity was $20.7 billion, and book value per share was $60.73, up 27% from a year ago. For the trailing 12 months ended March, our return on equity was 27.2%. During the quarter, we paid cash dividends of $85.6 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in May. We repurchased 3.2 million shares of common stock for $303 million during the quarter, for a total of 4.5 million shares repurchased fiscal year-to-date for $421 million. Subsequent to quarter end, our Board authorized the repurchase of up to $1 billion of our common stock, replacing our prior authorization. The new authorization has no expiration date. Jessica?

As we look forward, we expect current market conditions to continue with uncertainty regarding mortgage rates, the capital markets, and general economic conditions that may significantly impact our business. We are providing detailed guidance for the third quarter as is our standard practice. We are also providing incremental guidance for the full year now that we have seen the beginning of the Spring selling season with good homebuyer demand and signs of stabilization in pricing, incentives, and cost. We currently expect to generate consolidated revenues in our June quarter of $8 billion to $8.5 billion, and homes closed by our homebuilding operations to be in the range of 20,000 to 21,000 homes. We expect our home sales gross margin in the second quarter to be approximately 21% to 22% and homebuilding SG&A as a percentage of revenues in the third quarter to be in the range of 7.2% to 7.5%. We anticipate a financial services pretax profit margin of around 30%, and we expect our income tax rate to be approximately 24% to 24.5% in the third quarter. We are well positioned to continue aggregating market share in both our homebuilding and rental operations. For the full year, we currently expect to close between 77,000 and 80,000 homes in our homebuilding operations and between 4,000 and 5,000 homes and units in our rental operations. We expect our consolidated revenues for fiscal 2023 to be in the range of $31.5 billion to $33 billion. We forecast an income tax rate for the year of approximately 24%. We expect to generate increased cash flow from our homebuilding operations and on a consolidated basis in fiscal 2023 compared to fiscal 2022. We also plan to repurchase shares at a similar dollar amount as last year to reduce our share count, with the volume of our repurchases dependent on cash flow, liquidity, market conditions, and our investment opportunities. We have $400 million of senior notes that mature during the remainder of the year, which we are positioned to repay from cash. We will continue to balance our cash flow utilization priorities among our core homebuilding operations, our rental operations, maintaining conservative homebuilding leverage and strong liquidity, paying an increased dividend, and consistently repurchasing shares. David?

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and continue aggregating market share. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton team for your continued focus and hard work. And a special thank you from Don Horton, our Founder and Executive Chairman, to the countless D.R. Horton employees and trade partners over the past 45 years. We participated in and contributed to our journey to build, sell, and close 1 million homes. This concludes our prepared remarks. We will now host questions.

Your first question for today is coming from John Lovallo at UBS.

Good morning, guys, and thank you for taking my questions. The first one is, to the extent you can comment on April trends, I mean it sounds like from what we can gather from March checks in April has trended along pretty nicely. And along those same lines, if we think about the third quarter, typical absorption declining, call it, 10% sequentially. Is that a reasonable way as a starting point as we move into the third quarter here? Or how are you thinking about that?

Sure. We continue to be pleased with our sales pace in April. You heard us say stabilize a lot on the call, and we really feel like we've seen signs of that and everything has continued into April as we would like to see. In terms of what our Q3 sales look like versus our Q2 sales, typically, it can go either way. A lot of times, it's dead on within a few houses. So we could be slightly up. We could be slightly down. Sales-wise sequentially, it's going to be dependent though on the continued strength of the Spring, what happens with mortgage rates, and anything else, obviously, economics that could drive that. But right now, it feels pretty good.

Makes sense. And then just given the demand is holding up reasonably well, do you think there could be somewhat of an industry, I don't want to say land grab, but more of a push towards companies going out and trying to buy more land as maybe expectations reset a bit more positively to you ahead looking into 2024?

Most builders have a solid lot portfolio. We currently control around 550,000 lots, which gives us a strong position to manage increased demand. If demand slows, we also have flexibility within that portfolio. We plan to keep adding to our portfolio as opportunities arise on a deal-by-deal and market-by-market basis. So far, we haven't observed any significant land acquisition surge.

Got it. Thanks very much, guys.

Your next question is coming from Stephen Kim at Evercore ISI.

Thank you very much. I want to start by saying that if you achieve the high end of your guidance for closings this year, you will have maintained stable closings in 2021, 2022, and 2023, which is quite an impressive feat considering the volatility we experienced late last year. Congratulations on that. Now, I’d like to address market share. One emerging trend we’ve observed is that builders like yourselves are likely to gain market share, particularly from smaller private competitors who rely more on regional and local banks. I’d like to ask if you believe that a significant portion of the recent strength you’ve experienced can be linked to gaining market share, and if so, does this suggest that you can continue to see your volumes increase without a corresponding rise in overall costs, a concern that many have been grappling with in recent months?

In markets where we hold the largest market share, we observe greater stability in cost, demand, deliveries, and margins. We anticipate that as we continue to consolidate markets, a new norm of stability in margins and cost structures will emerge. This increased efficiency in delivering houses enables us to meet affordability requirements while maintaining margins. Our focus is not solely on the number of houses but on controlling market share, which enhances our access to trades and materials, and strengthens our relationships with developers and third-party realtors, ultimately driving our business.

Great. That's encouraging. Appreciate that. Second question relates to what degree you're able to ratchet back incentives looking ahead? I know you sort of talked about a stable environment, and I get that. But I also know that you are probably going to be adjusting what sort of product you put out to market. I would guess that probably has a little bit more of a value orientation. And I'm curious as to whether you anticipate over the medium term that you will be able to ratchet back your incentives as you roll out some more inherently affordable product by design?

Stephen, as we see stability in the market, it certainly allows us to pull back on incentives, and where we have the opportunity, and we have some pricing power. We're taking advantage of that. We aren't seeing a significant change in what we offer in the market. We have some smaller homes that we've been able to put out, and where it makes sense, we're taking advantage of that. So we do see an opportunity to continue to peel back on incentives and take advantage of pricing power on a go-forward basis.

And as with everything, we're not directing anything globally nationwide, community by community, market by market, our local operators are making those decisions to maximize returns at the local level.

Great. Thanks a lot, guys.

Your next question is coming from Carl Reichardt at BTIG.

Hi, everybody. Good morning. Thanks for the time. Last couple of quarters, there's been sort of a mixed bag in terms of geographic performance for builders with the Southeast Texas pretty good and the West weak. I'm curious in one quarter, and I know we're going to see some of this information when you guys put the stuff up on the site. But was there any sort of significant recovery in some of the markets that have been weaker, David, in the first quarter, especially in the West in terms of orders?

Carl, it's less, it's about positioning. We like the way we're positioned out there and then driving stability. So consistency, stability, flag count. I'm not sure that we saw significant improvement. But again, it's a part of the overall contributor, so.

Yes. Most of our pickup really was absorption versus community count. Our overall community count was only up 3% sequentially. We saw three of our regions up better than normal seasonality, but call it, still less than 60%. And then we have the Southeast, East, and North that were much higher. The North is a lot of new communities, new markets, but the Southeast and the East are just showing the continued strength, particularly in Florida and the Carolinas.

Thanks, Jess. Regarding the cycle times, you mentioned a reduction of 12 days. I'm interested to know if this decrease is solely due to supply chain improvements or if it’s also influenced by the shift to faster home completions. Are you anticipating further enhancements in this area in the latter half of the year?

Yes. Carl, that was primarily supply chain improvements, finally getting houses through various stages of construction, being better organized and prepared with the labor. And we saw improvement sequentially throughout the quarter, and we're continuing to see improvement in early construction stage movements of homes more recently started. So yes, we expect to see better cycle times as we progress through the year.

I appreciate it all. Thanks so much.

Your next question is coming from Mike Rehaut at JPMorgan.

Thanks. Good morning, everyone. First question, I wanted to get a sense. You mentioned that incentives have stabilized or recently stabilized. And based on our conversations with certain privates, there has been somewhat of an improvement in net pricing throughout the March quarter. I'm curious if you saw that as well? In other words, that net pricing by March end was better than the beginning of the year. And if so, all else equal, with that point, your 3Q gross margin towards the higher end of the range or even a little bit above, if you're expecting stabilization from here on in, particularly in this metric?

Yes, Mike, I think the key word we keep using here is stabilization. We've started to see pricing and incentive levels stabilize during the quarter. Naturally, as that stabilization remains in place a bit longer, you are able to tighten things up a bit. And as we've been able to move through the Spring selling season, community by community, we see strength, we see good turns. We're able to tighten those things up. So that's certainly overall an expectation, but it's community by community. So there are still places where we are seeing pricing still slightly decline, some places where we're seeing it stabilize, and some places we're able to start pushing it up a little bit. So on a net basis, as we look forward, we expect our margins to stabilize around current levels. So that's why our guidance range anticipates perhaps slightly below this quarter, perhaps a little above this quarter. And it's too early to know for sure how that will play out over the remainder of the coming quarter.

I appreciate that, Bill. Secondly, can you provide insight on the direction of ASPs not just for the second half of this year, but also into fiscal '24? Do you believe that most of the adjustments have already been made at the current levels, or are you considering potential changes in product mix to address affordability? Specifically, are you thinking about possibly lowering ASP in fiscal '24 to better meet market and affordability challenges?

Yes, Mike, I think that's just all part of the mix here, slightly reductions in the size of our homes trying to address the affordability equation. That's an ongoing effort for us. And that's why we leave a little room around current levels there, because we are always going to try to be as affordable as we can. But at the same time, if we have a good market and we're able to take advantage of some pricing power, we will do that also community by community. So stabilization is the word for the day, and obviously, we don't guide sales prices very far out. And it's largely going to be dependent ultimately on market conditions over the remainder of the year and what happens in the rate environment.

Your next question is coming from Matthew Bouley at Barclays.

Hi, good morning, everyone. Thanks for taking the questions. I wanted to follow up on Steve's question from earlier around sort of what's happening with credit tightening from regional banks. And of course, the smaller private builders generally leveraging the regional banking system. Are you actually seeing any changes competitively yet from those smaller builders in terms of land acquisition starts? How are you guys sort of reacting to any changing conditions from those builders? Thank you.

We haven't really seen any significant shift in how they're operating in the market. A lot of builders certainly have come out of the end of this calendar year and had inventory that they may have gone through cancellations. They've been working through that product. Not seeing significant starts on a go-forward basis for most of the smaller privates or regional, and we certainly have picked up a few land positions, a lot of positions here and there, but no significant shift in how they're addressing the market.

Got it. Okay. Thank you for that. And then secondly, it looks like you started less homes than you sold during the quarter. I think you guys have previously spoken about sort of aligning starts and sales pace. How are you guys thinking about that going forward? Is there any room to kind of push a little harder on starts here going forward given some of these improving demand trends?

Yes. We were in a transition in the last couple of quarters, it was more closely to sales. But really, our focus is tied closings in our sales pace. And if you look at that, we were kind of neck and neck this quarter. And so with our guide for next quarter and what we're trying to do market by market, community by community to build back our production capabilities, we would expect our starts to increase. The extent to which will be dependent on a lot of different factors, but we do expect our starts to increase next quarter.

All right. Thanks, Jessica. Thanks, everyone. Good luck.

Your next question is coming from Truman Patterson at Wolfe Research.

Hi, good morning, everyone. Thanks for taking my questions. First, hoping to get an update on your mortgage business and the overall environment. Are you seeing any distress in the market from mid-tier banks, tightening of mortgage warehouse financing, or tightening in consumer credit or lending standards for agency, non-agency loans? We've heard that it's been kind of business as usual, but I wanted to get your thoughts.

Yes, obviously, with all the headlines that we've had this quarter, we have been watching that market very closely, having a lot of conversation with our banking relationships, but I would echo what you heard. At the moment, it's still business as usual. But obviously, that's something we'll continue to monitor. We just renewed our mortgage warehouse facility this quarter, and we kept basically the same bank group in place. And so that market is still functioning and working as normal. But obviously, if we see further distress in that market, that's something we'll need to be prepared to adjust to.

Bill, that relates to both D.R. Horton and kind of the broader market, those comments?

Yes, absolutely. We all see the same headlines there. And depending on what happens in the rate environment and across the spectrum of banks, there could be further headlines, obviously. But today, no, we have not seen a significant impact.

Your next question is coming from Anthony Pettinari at Citi.

Good morning. Your net order ASP was up, I think, 1% quarter-over-quarter, which is a little bit better than we were expecting. Just wondering if there's any kind of mix effects that you'd call out there, whether regionally or product type kind of given the commentary around incentive stabilizing?

I think it's pretty much like-for-like. We saw a stabilizing market through the quarter. In fact, about half of the homes we delivered this quarter were sold in the quarter. And so we feel pretty good about market conditions right now. We've seen good stabilization in pricing and incentive levels, and when we see that, we're hitting absorptions in the communities at a community-by-community level, we're looking to adjust incentive levels and pricing.

Okay. That's helpful. And then just on the full year outlook, does that assume kind of mortgage rates around current levels? And if rates were to moderate a bit, do you have maybe some room to flex up production? Or should we think about that 80,000 to sort of an upper limit of where you could go for the year?

I think the range we provided for the year is a realistic range given current conditions and our homes that we currently have in inventory and in production. As we've already stated, we do expect to incrementally increase our starts in the coming quarters. We saw a nice step-up in our starts this quarter and would expect that to incrementally improve from here. But in terms of significant upside to the delivery this year, I think we would say that our current range is a realistic one under all circumstances.

Okay. And the mortgage rate assumptions around the full year guidance or just kind of around where we are or anything you'd call out there?

Yes, current conditions. We guide based on current conditions. If things change, that obviously could affect our outlook.

Your next question is coming from Susan Maklari at Goldman Sachs.

Thank you. Good morning. My first question is, can you talk a little bit about what you're seeing on the rental side of the business? As we've seen the for-sale side, get a little better in the quarter. Are you seeing any shift there? And how are you thinking about the outlook for the rentals?

We have seen good pace on our ability to rent up both our apartments and single-family for rent. We have seen stability in rent rates. They've been increasing quite a bit over the prior 12 months, and we've seen stability there. On the purchase side, we still see activity in the market. We have certainly some units that we pushed out and sold consistent this quarter really would last in terms of the number of units. And although we have seen the number of buyers back off some and a little bit of tightening in credit in terms of their ability to get to these financed, we still see pretty solid demand for the communities that we have out to market.

Okay. That's helpful. And then given the outlook and the trajectory demand the way it seems to be coming together. Can you talk a bit about your appetite for land acquisitions? Land spend, I believe you said was about flat sequentially. How are you thinking about that as we go through the next couple of quarters?

We're really just continuing to look at replenishing the supply market by market. We've got a good lot position, a good flexible lot position. So we'll continue to incrementally just replenish it. I don't necessarily expect significant moves one way or the other. But as our volume of sales and closings increases, then we'll be to be replenishing a little bit more to match that.

Your next question is coming from Eric Bosshard at Cleveland Research.

Good morning. Two things. First of all, I think the gross margin in the quarter was a bit better than you had targeted. What was different that drove the relative better gross margin performance?

I believe the main difference was that our pricing stabilized at a slightly higher level than we had projected. We did not observe signs of stabilization at the end of Q1. However, once we entered Spring, we were able to see that stabilization really start to take shape. Therefore, I think we are experiencing that stabilization a bit sooner than we would have anticipated a quarter ago.

We definitely saw a strong start to the Spring selling season in the March quarter. And as I mentioned before, half the homes we closed were sold in the quarter. So they benefited from some of the stabilizing and improving price environment. We carried a fair number of completed specs in the quarter.

Okay. And then secondly, in regards to incentives or pricing, could you provide information on the average rate for closings? I’m trying to understand the extent of rate buy downs and what that looks like. In other words, what rates are necessary to make consumers comfortable with closing on homes?

Yes. So our average general buy-down is typically a point on the loan value. So I would say there's been a lot of headlines out there talking about 5.5%. It fluctuates probably a little bit, but 5.5% is relatively reasonable in terms of what a consumer is okay with at this point.

Roughly 60%, 65% of our buyers are utilizing that buy down through our mortgage company. And so they're getting that benefit of that point buy down.

And then regarding the trend within that, has there been any change within that? Or is that kind of the bulls out that works? And obviously, the mortgage market moves around, but is that 5.5% the 60 to 65, has there been any variability in the trend around either of those?

It's been pretty consistent certainly throughout the quarter, and rates have stayed relatively consistent. And we will fluctuate our rate to the market based on what we see in the overall market rates. So for the last quarter, it's hovered right around that 5.5% and seems to be accepted by our homebuyers.

Your next question is coming from Alan Ratner at Zelman & Associates.

Hi, everyone. Good morning. I appreciate you taking my question. Great quarter. My first question is about your position as an entry-level builder, but also your exposure to various price points in the market. Are you noticing any significant differences in demand trends across those price points? Additionally, we have noticed in recent quarters, and I believe you mentioned this too, that buyers have been hesitant to stay in backlog for extended periods due to rate volatility, and that you were holding off on specs until they were further along in construction. Has that situation changed? With the current stability, are buyers now more willing to remain in backlog for a longer time?

I think we are seeing some buyers willing to buy earlier in the production process. There's been a little bit of stability in market rates, and they feel good about that. But the better thing for us is we're seeing our cycle times improve. So we're still able to give them sort of a shorter period of time in backlog than they would have had six months or certainly a year ago. And so there's a confidence level that we're able to sell from that helps that buyer quite a bit.

Got it. And on the price point question, any notable differences that move up and active adult recognizing it's a smaller part of your business?

No, Alan. We really haven't seen market to market a significant difference in terms of levels of demand as we go up and down the price curve, even where we are at the higher end of the price market in any given market, we're still at the value price point for that price. So we're still seeing that demand. And for us, if they've come off of a $700,000 price, that means they may be looking for 6 or 5. And so we are catching those people, I think, as they move down the curve.

And what still hasn't changed is the amount of existing home inventory out there and available. That remains very limited. And so if somebody does want a home at a higher price point or a lower price point, new construction is where they can find it right now.

And you also have the trend of migration from high-cost states to lower-cost states, what seems like a high price point in Florida where our Florida operators is a relatively low price for somebody coming from New York or California.

Understood. If I can squeeze in a follow-up on the rental segment. If I look at the average order price of your SFR homes, it's come down quite significantly. And I'm sure there might be some mix involved there since we're talking about a relatively small number of homes. But is that 25%, 30% decline in per unit price. I think this quarter's average was in the low 300s. Is that representative of what's going on in the market today? Or have the trends mirrored the for-sale market?

I think we've seen certainly through the fall with the disruption in the capital markets, increases in cap rates for the disposition of those properties. But largely what we saw this quarter was a change in mix of geographies of where those homes were being delivered and related rental rates and NOIs on those projects. So still feel good about the overall platform for sure. Very excited about the opportunities that are in front of us with that and excited that the capital markets have been stabilizing a little bit, which is going to help execution for sure, on the disposition of those properties.

And also expect, on a go-forward basis, to see a little more variability in our rental platform just because we're selling whole communities at a time, and they could be townhomes or smaller homes, or geographic location can cause that to move around a little more than our for-sale business.

Until the volume and the number of projects closing in the quarter gets up to a larger level in a steady state, you're going to see a little bit more lumpiness in the quarter-to-quarter stats there.

And I will say it's very difficult to put a lot on the ground and get a house built, very little inventory out there, and a lot of money chasing investment properties. So we think we have high hopes for this product segment.

Appreciate the color. Thanks, guys.

Your next question is coming from Rafe Jadrosich at Bank of America.

Hi, good morning. Thanks for taking my question. I wanted to ask, how do you think about how your ability to offer rate buy downs impacts demand and sort of a volatile mortgage rate environment? Do you see volatility in weekly traffic and demand as mortgage rates move around? Or is your ability to offer rate buy down to prevent that?

I think you could certainly see, as rates shift in traffic, you're going to see that change either up or down. But the sales cycle time isn't immediate. And so our agents and our realtor partners do a good job of maintaining those buyer relationships, and our ability to offer some stability in that rate helps us really at the close.

And just certainty of payment gives the confidence to the buyer and at a 5.5% rate, we have more qualified buyers than we do at a 6.5% rate. So it opens up ownership to more people if you're able to present that.

Much easier to manage to the interest rate environment when now you're talking about 20 to 50 basis point moves in rates versus what we were experiencing in the back half of last year. I mean it's just not as impactful as what we had to manage through last year.

Thank you. I would like to follow up on an earlier question regarding how the gross margin performed compared to your initial guidance for the quarter. It seems that the pricing stability was better than expected. Did you increase prices at all during the quarter, and did the gross margin improve over time? Or was there a better elasticity, allowing you to avoid lowering prices as much as you thought would be necessary to sell homes at the current rate?

Versus the guidance we gave, it was the latter. We did not have to lower as much as we had been projecting necessarily. But in terms of how we're actually managing community by community that's a mix bag as we got into the spring, and we did, as Mike said, we sold about half our homes that we closed this quarter in the quarter. So as we started hitting our pace, seeing solid demand into the spring, definitely in certain communities, we are starting to push pricing up carefully, but are pushing it up.

Thank you. Very helpful.

Your next question is coming from Buck Horne at Raymond James.

Hi, thanks. Good morning. Before we move on from the rental segment, I wanted to dive a bit deeper into your expectations for single-family rentals compared to multifamily for the rest of the year. You mentioned some changes in cap rate expectations due to higher capital costs and market disruptions. Is this trend more significant in multifamily rather than single-family rentals, or is it the other way around? What are you observing regarding buyer expectations for stabilized cap rates in both segments?

What are we seeing? Other than noting that they are higher than they were a year ago, it does appear to have stabilized going forward. I don't think there has been a significant change between multifamily and single-family rental. The relative gap remains unchanged. Generally, multifamily projects tend to underwrite at a slightly lower cap rate. Comparatively, it's a more established and familiar market, but we are still very pleased with the performance we are receiving from that segment and the disposition opportunities that lie ahead over the next several quarters.

Okay, that’s helpful, I appreciate it. Hypothetically thinking ahead regarding challenges in the regional banking environment and potential capital constraints for smaller regional homebuilding competitors, do you believe it’s possible that more merger and acquisition opportunities might arise either later this year or next year due to these constraints on some of your small private competitors?

Well, we do believe that the capital constraints for the privates and smaller builders is going to be impactful, and we see opportunities. We evaluate the opportunities and based upon positioning people in market that they have, we'll pursue them or not. But here regardless, it's going to help us aggregate markets, whether it's via acquisition or picking up lots or just providing more inventory availability than can be done by a private or a small region. So it's an opportunity for us.

Your next question is coming from Alex Barron at Housing Research Center.

Yes, thank you. I was hoping we could take a broader perspective. At the end of 2020, there was significant demand, and many placed large orders, but then encountered supply chain problems the following year. Currently, demand is strong at 6% to 6.5% rates. If rates were to decrease to below 6% or around 5% in the next year, how do you plan to adapt this time to capture and fulfill those home deliveries? Have you considered options like warehousing materials, hiring additional crews for deliveries, or some form of vertical integration? What are your thoughts on strategies to grow rather than just limit your deliveries?

I think there is just a built-in capacity issue in the industry. And even when you think you've got everything solved, then something else happens. I mean the transformers that bring some innovations for life could be a huge issue and getting lots delivered within the next 12 to 15 months. And so you're constantly looking at how are you positioned, where can we pick up incremental capacity, both in trade and in lines, and from a division level push, that is really kind of what we've been focused on, simplifying our operations, consolidating markets, consolidating trade capacity. And how do we improve our logistics of getting materials to communities. But it's just within the entire industry, if we had 100% of the trade material capacity, it would still be constructed. It's very difficult for lots on the ground, very difficult to get a house built. And I do think that's why we're gaining market share because we are 100% focused on controlling capacity throughout the supply chain.

Okay. And in terms of the land supply, I mean, you guys have shifted materially in the last few years. What percentage of your lots you own versus how many you option? And you obviously acquired Forestar to kind of help in that process, but is there anything else that you could do to I guess, grow Forestar or do something to shift your ability to increase that ratio of going to option even more?

Well, let's just continue to work. We are focused on developing strong relationships with our partners so that they trust us to execute deals at the highest level in the industry. Building and maintaining these relationships takes hard work and requires us to uphold trust, regardless of market conditions. We will keep striving to improve next year. There is no easy solution; it requires hard work, trust, transparency, and relationship-building.

Your next question is coming from Mike Dahl at RBC Capital Markets.

Good morning. Thanks for taking my question. Just a follow up on the lot side. A couple of comments already on the call, but you note the flexibility in your current portfolio, not necessarily getting too aggressive on offense. Yes, I'm still expecting somewhat elevated option write-offs. I guess I'm wondering, clearly, as the markets improved, probably some deals that you have in your existing book maybe you didn't think they would pencil a quarter or two ago and now they might be. Any way that you could kind of ballpark quantify what deals you think have kind of come back into the underwriting box on what makes sense today versus things you might have thought you would walk from prior?

We have so many deals under contract and evaluation at any point in time. It would be really hard for us to have any sense of what fell out or was falling out and leading our global operations teams to think this deal doesn't work anymore, and now it might. I can tell you, as David said, anytime we have an opportunity to get finished lots that are increasingly difficult to get produced these days, we are aggressively looking for ways to work with our development partners, landowners to make the deals work and to find ways to bring those lots to market. So it's a constant evaluation process and the transparency and the relationships we've built over 45 years of doing this really help us achieve that.

Got it. Okay. For my second question regarding capital allocation, with the buyback based on the dollar figure in your guidance, it seems like the stock is moving, but that doesn't necessarily mean you can buy as much as you could have a quarter or two ago. As we consider incremental capital allocation, the balance sheet, and cash flow expectations, will you continue to target that dollar figure? Or can we expect that as the year progresses, you'll shift back to targeting a specific level of either dilution offset or net share count reduction?

Yes. We are certainly considering both the amount of money invested and its effect on the share count, and I would never complain about a rising stock price related to our repurchase efforts. At the end of the day, our focus is on the dollars we're investing. We evaluate our cash flow, earnings, liquidity levels, and future projections. If our projections and cash flow outlook improve compared to what we had previously anticipated, it raises the likelihood of increasing share repurchase levels. However, for now, as we assess the remainder of the year and our capital investment needs, we expect to maintain a similar level of dollar investment as last year, but we will continuously reevaluate that.

Okay. Thank you.

Your next question is coming from Jay McCanless at Wedbush.

Great. Good morning. Thanks for taking my questions. So if my math is right, I think this is the fifth quarter in a row where average selling communities have been up year-over-year. I guess, and I think you talked a little bit about this earlier, David, what are the headwinds remaining to continuing that kind of growth streak? And I'm presuming that the lot count you have right now could support further growth, but maybe just talk about that trajectory?

It's going to be market-driven, as Mike mentioned earlier, we have an opportunity to acquire finished lots through various means, and we will pursue that actively. The market is consolidating, similar to managing a lumber yard. By controlling the lots, we also control capacity and our ability to meet demand. I expect the committed count will keep declining. This was previously due to new communities selling out quickly, which is a positive sign. However, the market is stabilizing. There's improved visibility into market conditions, allowing us to assess absorption rates, establish a starting pace, and manage production efficiently. So to sum it up, I believe you will see our community count continue to increase.

Yes.

We have reached the end of the question-and-answer session, and I will now turn the call over to David Auld for closing remarks.

Thank you, Holly. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third quarter results in July. And finally, congratulations to the entire D.R. Horton team in producing a solid second quarter. Continue to compete and continue to win every day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.