Good morning and welcome to the fourth quarter 2023 earnings conference call for D.R. Horton, America's Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Tom. And good morning. Welcome to our call to discuss our fourth quarter and fiscal 2023 financial results. 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 subsequent reports on Form 10-Q, all 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-K late 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 & Events for your reference. Now I will turn the call over to David Auld, our Executive Vice Chair.

Thank you, Jessica. And good morning. I am pleased to also be joined on this call by Paul Romanowski, our President and Chief Executive Officer; Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. When we talk about our results, I'd like to congratulate Paul on his well-deserved promotion to CEO that was effective October 1. We have been preparing for this transition internally for quite some time. We are positioning our leadership throughout the company for the future, and I will still be actively involved as executive vice chair of the board of directors. Our executive team remains in place with the same individuals and Paul has the support of our executive, region, and division leadership. He is a proven leader who has been successful throughout his group. Now on to our results. The D.R. Horton team finished the year with solid fourth quarter results, highlighted by earnings of $4.45 per diluted share. Our consolidated pre-tax income was $2 billion on a 9% increase in revenues to $10.5 billion, with a pre-tax profit margin of 19.2%. For the year, earnings per diluted share was $13.82 and our consolidated pre-tax income was $6.3 billion on a 6% increase in revenues to $35.5 million, with a pre-tax profit margin of 17.8%. We closed a record 91,204 homes and apartments this year in our homebuilding and rental operations. Our cash flow from operations for 2023 was $4.3 billion. Our homebuilding return on inventory for the year was 29.7% and our return on equity was 22.7%. Despite continued high mortgage rates and inflationary pressures, our net sales orders increased 39% from the prior-year quarter. As a result, both new and existing homes at affordable price points are limited and demographics supporting housing demand remain favorable. We are focused on consolidating market share by supplying more homes at affordable price points to meet homebuyer demand, while maximizing the returns and capital efficiency in each of our communities. With improvements in both labor capacity and availability of materials, our cycle times are decreasing, positioning us to improve our housing inventory turns. We are well-positioned with our experienced operators, affordable product offerings, flexible lot supply, and strong capital and liquidity positions to generate strong cash flows and produce consistent returns. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, including returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Paul?

Earnings for the fourth quarter of fiscal 2023 decreased 5% to $4.45 per diluted share compared to $4.67 per share in the prior-year quarter. Earnings for the year decreased 16% to $13.82 per diluted share compared to $16.51 in fiscal 2022. Net income for the quarter decreased 7% to $1.5 billion on consolidated revenues of $10.5 billion. And for the year, net income decreased 19% to $4.7 billion on revenues of $35.5 billion. Our fourth quarter home sales revenues were $8.8 billion on 22,928 homes closed compared to $9.4 billion on 23,212 homes closed in the prior year. Our average closing price for the quarter was $382,900, up 1% sequentially and down 5% from the prior-year quarter. Mike?

Our net sales orders in the fourth quarter increased 39% to 18,939 homes and order value increased 34% from the prior year to $7.3 billion. Our cancellation rate for the quarter was 21%, up from 18% sequentially and down from 32% in the prior-year quarter. Our average number of active selling communities was up 2% sequentially and up 10% from the prior year. The average price of net sales orders in the fourth quarter was $383,100, up 1% sequentially and down 4% from the prior-year quarter. To adjust to changing market conditions and higher mortgage rates, we have increased our use of incentives and are reducing the size of our homes where possible to provide better affordability for our homebuyers. We expect to continue utilizing a higher level of incentives in fiscal 2024, particularly rate buy-downs in the current interest rate environment. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Bill?

Our gross profit margin on home sales revenues in the fourth quarter was 25.1%, up 180 basis points sequentially from the June quarter. The increase in our gross margin from June to September reflects the slight increase in our average sales price and lower stick and brick costs on homes closed during the quarter. On a per square-foot basis, home sales revenues were up 2.5% sequentially, while stick and brick cost per square foot decreased 2.5% and lot costs increased 6%. As Mike mentioned, we expect to continue offering a higher level of incentives in fiscal 2024 to help address affordability. Due to recent increases in volatility in mortgage rates, our incentive costs have increased on recent sales, and we expect our homebuilding gross margins to be lower in the first quarter compared to the fourth quarter. Jessica?

In the fourth quarter, our homebuilding SG&A expenses increased by 2% from last year and homebuilding SG&A expense as a percentage of revenues was 6.6%, down 10 basis points from the same quarter in the prior year. For the year, homebuilding SG&A was 7.1% of revenues, up 30 basis points from fiscal 2022. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

We started 21,100 homes in the September quarter, down 8% from the June quarter. We ended the year with 42,000 homes in inventory, down 9% from a year ago and down 4% sequentially. 27,000 of our total homes at September 30th were unsold, of which 7,000 were completed. For homes we closed in the fourth quarter, our construction cycle time decreased by a month from the third quarter, reflecting improvements in the supply chain. We will continue to manage our homes and inventory and starts pace based on market conditions, and we expect further improvements in our cycle times and housing inventory turns in fiscal 2024. Mike?

Our homebuilding lot position at September 30th consisted of approximately 568,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 35% of our total owned lots are finished and 54% of our controlled lots are or will be finished when we purchase them. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our fourth quarter homebuilding investments in lots, land, and development totaled $2.3 billion, up 7% sequentially. Our current quarter investments consisted of $1.5 billion for finished lots, $580 million for land development and $290 million for land acquisition. For the year, our homebuilding investments in lots, land, and development totaled $8 billion, up 6% from fiscal 2022. Paul?

In the fourth quarter, our rental operations generated $217 million of pre-tax income on $1.4 billion of revenues from the sale of 3,006 single-family rental homes and 1,582 multifamily rental units. For the full year, our rental operations generated $524 million of pre-tax income on $2.6 billion of revenues from the sale of 6,175 single-family rental homes and 2,112 multifamily rental units. Our rental property inventory at September 30th was $2.7 billion, which consisted of $1.3 billion of single-family rental properties and $1.4 billion of multifamily rental properties. Our rental operations generated significant increases in both revenues and profits this year as our platform is maturing and expanding across more markets. Due to the rise in interest rates and volatility and uncertainty in the capital markets, we are not providing separate guidance for our rental closings in fiscal 2024. Based on the current pipeline of rental projects, we do expect to have more multifamily unit closings in fiscal 2024 than in fiscal 2023. Bill?

Forestar, our majority-owned residential lot development company, reported revenues of $550 million for the fourth quarter on 4,986 lots sold with pre-tax income of $95 million. For the full year, Forestar delivered 14,040 lots, generating $1.4 billion of revenues and $222 million of pre-tax income with a pre-tax profit margin of 15.4%. Forestar's owned and controlled lot position at September 30th was 79,200 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $410 million of our finished lots purchased in the fourth quarter were from Forestar. Forestar had approximately $1 billion of liquidity at year-end with a net debt-to-capital ratio of 5.5%. Forestar is uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to consolidate significant market share over the next few years, with its strong balance sheet, lot supply and relationship with D.R. Horton. Mike?

Financial Services earned $85 million of pre-tax income in the fourth quarter on $220 million of revenues, resulting in a pre-tax profit margin of 38.9%. For the year, financial services earned $283 million of pre-tax income on $802 million of revenues, resulting in a pre-tax profit margin of 35.3%. During the fourth quarter, virtually all 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 51% of the mortgage company's volume. Borrowers originating with DHI Mortgage this quarter had an average FICO score of 725 at an average loan-to-value ratio of 87%. First-time home buyers represented 55% of the closings handled by our mortgage company this quarter. Bill?

Our balanced capital approach is disciplined, flexible, and opportunistic to support our operating platform and produce consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During fiscal 2023, our consolidated cash provided by operations was $4.3 billion, and our cash provided by homebuilding operations was $3.1 billion. Over the past five years, our homebuilding operations have generated $9.6 billion of cash flow. At September 30th, we had $7.5 billion of consolidated liquidity, consisting of $3.9 billion of cash and $3.6 billion of available capacity on our credit facilities. We repaid $400 million of senior notes this quarter, and our debt at September 30th totaled $5.1 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at September 30th was 18.3% and consolidated leverage net of cash was 5.1%. At September 30th, our stockholders' equity was $22.7 billion and book value per share was $67.78, up 20% from a year ago. For the year, our return on equity was 22.7%. During the quarter, we paid cash dividends of $84 million for a total of $341 million of dividends paid during the year. We repurchased 3.5 million shares of common stock for $423 million during the quarter. And for the year, we repurchased 11.1 million shares for $1.2 billion, which reduced our outstanding share count by 3% from the prior year-end. In October, our Board of Directors authorized the repurchase of up to $1.5 billion of our common stock, replacing our previous authorization. Based on our strong financial position and cash flow, our board also increased our quarterly cash dividend by 20% to $0.30 per share. Jessica?

As we look forward to the first quarter of fiscal 2024, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets and general economic conditions that may significantly impact our business. In our December quarter, we currently expect to generate consolidated revenues of $7.4 billion to $7.6 billion and homes closed by our homebuilding operations to be in the range of 18,500 to 19,000 homes. We expect our home sales gross margin in the first quarter to be approximately 23.7% to 24.2% and homebuilding SG&A as a percentage of revenues in the first quarter to be around 7.7% to 7.9%. We anticipate a financial services pre-tax profit margin of between 20% and 25%, and we expect our income tax rate to be in the range of 24% to 24.5% in the first quarter. We are well positioned to continue consolidating market share in both our home building and rental operations. Our fiscal 2024 home closings volume, pricing, and margins in our homebuilding, rental, financial services, and Forestar businesses will be determined by market conditions and our efforts to meet the market by balancing pace and price to maximize returns. For the full year of fiscal 2024, we expect to generate consolidated revenues of approximately $36 billion to $37 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 89,000 homes. We forecast an income tax rate for fiscal 2024 in the range of 24% to 24.5%. We expect to generate approximately $3 billion of cash flow from our homebuilding operations. We also plan to repurchase approximately $1.5 billion of our common stock to continue reducing our outstanding share count in addition to dividend payments of around $400 million. We will continue to balance our cash flow utilization priorities among our core homebuilding operations, our rental operations, maintaining conservative 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, and broad geographic footprint across 118 markets. Our strong balance sheet, liquidity and loan leverage provide us with significant financial flexibility to meet changing market 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 while consistently returning capital to our shareholders through both dividends and share repurchases. Thank you to the entire D.R. Horton team for your focus and our work. Due to your efforts, we just completed our 22nd consecutive year as the largest and strongest builder in the United States, and we look forward to working together to improve our operations and provide homeownership opportunities to more American families during 2024. With my transition to executive vice chair, this will be my last public earnings call. It has been an honor and a privilege to represent and report on the D.R. Horton team's remarkable efforts for the past 10 years. Thank you all again. This concludes our prepared remarks. We will now host questions.

The first question this morning is coming from John Lovallo from UBS.

First question is just on the gross margin in the quarter of 25.1%. That was well above your expectations, above, I believe, 23.5% to 24%. Despite what seems like a greater use of incentives and perhaps even a higher cost of incentives, can you just help us kind of work through some of the puts and takes on gross margin in the quarter versus your expectations?

The second half of the fiscal year, we had a little more relative stability in the rate environment, and so we were able to level off our incentives really in Q3 and Q4. We also then had a little bit of price traction that allowed our average sales price to tick up just a tad in the fourth quarter. And then really, one of the biggest benefits was we did see continued improvement in lumber costs. And so, our overall stick and brick costs on our homes came down in the quarter. We do think we basically realized the majority of that lumber cost benefit in the near term and within the more recent rise in interest rates and the use of incentives. That's why we're guiding down for Q1, but we had some benefits that supported the increase in gross margin in Q4.

Maybe sticking with gross margin. As we look forward into the first quarter, the 23.7% to 24.2%, if we think about the sequential decline that's implied in there, it sounds like there's going to be higher incentives and, again, maybe a little bit of higher costs. You mentioned that the lumber benefit might be through. What are the other sort of puts and takes that we should consider in that sequential margin?

I think you summed it up pretty well, John. I think we see higher incentives coming forward with the rapid rise in interest rates through the last six weeks or so. A little bit of moderation last week, which was helpful, but one week doesn't make a trend, I don't think. And we do sell a significant number of the homes we closed in the quarter during that quarter. I think for the fourth quarter, 39% of our closings were sold in the quarter. So we're at a pretty real-time indication of margins in the business as it comes through.

Your next question is coming from Stephen Kim from Evercore.

Congratulations on the good results. You gave an interesting – well, you gave a guide for $3 billion in homebuilding cash flow for next year. I wanted to get a sense from you, how much of that do you think is going to be benefited by a reduction in work in process inventory?

We are able with our improved cycle times. We are seeing improved inventory turns and our assumption next year is that we will see some further improvement in cycle times and inventory turns. So we are able to operate with a relatively lower level of homebuilding inventory. However, we're also guiding to a volume increase. And so, I don't necessarily expect an absolute decrease in our homes and inventory, but we do expect to be turning it faster. So that's definitely a contributing factor to the cash flow.

But not an actual reduction in the WIP levels, okay. That's helpful. So that means that it's really coming from the income and, I guess, maybe a reduction in land assets? Would that be fair?

Or it's just an improvement in our turns of our land assets. So, yes, primarily from profits that's resulting from the improved turns.

Second question is related to rate buydowns. Could you give us a sense for what the average rate actually used in the quarter, in your September quarter, was for your customers? And if we were to look at sort of what your average is for, let's say, orders being taken today, what would that average rate be?

The average rate can move quite a bit through the quarter, but we tend to stay about 1 to 1.25 points below market at any given time. And today, we're offering on an FHA government loan, roughly in the 5.99% rate and, on a conventional 6.25%, which is right in that range of 1.25, 1.5 below today.

And is that what most people are actually using?

About 60% of our total closings are used with some form of a rate buy-down. And so, a big percentage of – and the most successful incentive we have seen has been to impact that monthly cost of homeownership through some form of rate buy-down.

Sorry, just to clarify, you're saying that 60% of your closings in some form of buy down, do you know what the average rate cutting across all of the kinds of buy-downs that people are using, what that actual rate was underpinning the mortgages?

I'm going to say probably in the 6-ish range.

Your next question is coming from Joe Ahlersmeyer from Deutsche Bank.

Congrats on executing so well this year. I appreciate also the effort to give the visibility for the full year here. I just wanted to talk maybe about those inventory turns a little bit further. Your guidance for closing suggests something above 2 times on your current homes and inventory level. I know that's an important threshold for you guys. Just wondering maybe then what the starts look like over the next couple of quarters to make sure that you deliver on that closing guidance in the back half, but also sort of gear up for growth again in 2025, while maintaining that 2x target, how the starts could look?

Our starts should tick down a little bit sequentially, but our base case, subject to market conditions, as everything and the strength of the spring, is that we would expect to increase our starts gradually, quarter to quarter as we move throughout the year, to position ourselves to deliver on the guidance that we've talked about and then obviously to also exit 2024 positioned to grow into 2025. So we're working market by market, community by community to improve our production capabilities. And what we want to do is make sure that as we're increasing our starts that it's sustainable. So that's why you're just going to see it gradually happen throughout the year.

Thinking about your return on inventory on a trailing basis, it has been normalizing, of course. But where do you think that can settle out if you've got headwinds maybe on the profitability side from land and incentives, the tailwinds from that production efficiency. Could we actually sort of settle out here in the high 20s? Is that realistic?

Well, the way we're running our business, the way we underwrite our land deals, that's our focus, with our focus on purchasing finished lots and as many deals as we can. Yes, our goal would be to keep that return on inventory in the homebuilding business as high as we can. And so, definitely, mid- to high 20s is a good level for us. It does fluctuate with where gross margins are. So we've been coming down off of some of the peak gross margins we saw last year, but definitely mid to high 20s is a level that we're striving to achieve.

Your next question is coming from Carl Reichardt from BTIG.

Joe stole one of my questions. But looking at the guide for next year, are you anticipating much alteration in mix in terms of geography or price points? And I'm particularly interested in some of the smaller markets where you all are really the only large builder, a couple of the acquisitions you've done. What percentage of deliveries next year do you think might come from markets like that, however you want to define it?

Don't probably have a good breakdown of deliveries by market, stratified by market size or recent entrants, but we do expect to see probably a rotation to smaller home footprints and introduction of smaller plans where we can get municipality approvals. Again, just to maintain the affordability, I think we will see that we're going to continue to roll with starts, but the compressed cycle times that we've gotten out of our construction process is going to allow us to deliver a lot more homes on fewer homes carried in inventory at any given quarter end date.

Carl, this doesn't perfectly answer your question, but I do want to let people know that in our investor presentation we're going to post, as we usually do, post the call, we've updated our market share dominant slide pretty dramatically to make sure it aligns with all of the markets we operate in. We did a lot of work with Zonda and our internal data. And so, now instead of just reporting on the top 50 US housing markets and where we rank in those, we're talking about all 118. And so, it will give you some more insight into where we are in terms of whether we're number 1, top 5, top 10. Out of the 118 markets we're in today, only 7 we're not top 10 in and we went through those last night and they are all markets that we essentially have just entered within the last year or two. So we would expect to be top 10 very quickly and then move up into the top 5 and certainly continue to work on becoming number 1. So it doesn't answer geographic mix, but I did want to kind of plug the fact that we gave incremental data on market share that we hadn't historically put out there.

Just as a follow-up, I know you're not guiding on the rental business in 2024, it's becoming a bigger portion of PTI and obviously taking up some balance sheet. From an institutional investor perspective on both multifamily and single family, how has that appetite fared for the projects you're selling at stabilized occupancy? Obviously, spreads have come in there, but there's also a lot of capital, I would guess, chasing both asset classes. So I'm just sort of curious what you're seeing from those customers.

We are still seeing strong interest, Carl, from the institutional investors that are out there. As you mentioned, the spreads have come in. And we're going to see some volatility in gross margin as we move through this process and move through the markets of higher rates, but still seeing consistent activity. I still feel we are in a great position to be the dominant supplier of single-family rental and continuing to grow our multifamily platform.

Your next question is coming from Mike Rehaut from J.P. Morgan.

I wanted to focus for a moment on the fiscal 2024 closings growth guidance of up 4% to 7%. It seems like that's a little bit below maybe what you typically shoot for in kind of like a high single-digit range, if I'm not mistaken. And I'm just curious if that's a function of maybe the current backdrop with the recent move in rates. Also, obviously, your backlog is still down over 20% year-over-year. Just kind of wondering if there's a little bit of a timing gap here given the backlog, maybe given the current environment, that high single-digit rate is something we should think about you guys maybe returning to in 2025, all else equal?

Great question, Mike. We expected it. We do talk about always positioning ourselves for growth, and you typically hear us talk about plus or minus 10% is how we're going to position the company. If you look at how we're exiting 2023 though and our guide for fiscal 2024 closing, it does already assume our typical 2 times housing turn, actually a little bit better than that at the high end. So 2.04 times to 2.11 times would be our guide. And so, it's already incorporating our improvement in cycle times. And if we continue to be able to have success with that throughout the year, we'll consider that in what we talk about publicly in terms of what we're able to deliver for fiscal 2024. But as we sit here in November, that's a realistic expectation for closing with the visibility that we have today. It's not necessarily that we've seen a big falloff in demand. Obviously, our sales were up very strong. And so, it's more a function of the houses we have in inventory and our cycle times.

This is Mike. Just following on with that is that our lot position is very strong right now. We own 50,000 lots that are finished, and there's obviously more that are in the controlled portion of our portfolio, that – as we see the market unfold for the year, we will be able to accelerate starts to meet any increased demand. Coming into 2023, we saw a rate spike at the end 2022 and we were a little concerned about the year and the outlook we gave last year at this time. And the team stepped up and delivered a great year in fiscal 2023 and against that backdrop. So positioning for conservatism in the year, but always are – have a desire to grow and to grow in that double-digit level.

I guess also just wanted to circle back. You had mentioned with regard to sticks and bricks, 6% lot inflation. Is that something that has been accelerating, I guess, not just sticks and bricks, but maybe just more broadly, where is a lot as well as construction cost inflation for the fourth quarter on a year-over-year basis? And how do you expect that to play out in 2024 based on current trends? And would that require some amount of price appreciation to offset, let's say, to maintain your fiscal – your first quarter gross margins?

Mike, sticks, and bricks, we've been – the last couple of quarters have been seeing the benefit of lower lumber costs. However, across most other cost categories, in the vertical construction costs, we are still seeing modest inflation. So on a year-over-year basis in the quarter, our stick and brick costs were down 3.5% on a per square foot basis. But our lot costs were up 11%. So we're seeing more inflation in our lot costs. And so, as we look forward into fiscal 2024, we would expect to continue to see inflation in our lot costs as land moves through and development cost inflation continues. And I think we would still expect to still see some modest inflation in some of the other stick and brick categories. There has been some recent moderation in lumber costs. As we move through 2024, we'd expect to see some benefit from. But overall, I think we still expect costs to show moderate inflation. As far as price appreciation with the current rate environment, the volatility and the recent rise in rates, we're not expecting any price appreciation. Our base case would probably expect a little bit of downward pressure on prices. And as we've already talked about, we are using higher incentives going into the first part of the year. Now rate environment can change. Strength of the market can change as we go into the spring, and so we'll adjust depending on what we see in the market as we get further into the year.

Carl asked about geographic mix, but that's a good point here in terms of just our reported average sales price. We are continuing to shift, as we said in our prepared remarks, to more and more of our smaller floor plans to address affordability issues in the market. So we could have some downward pressure on price that's solely just a function of product mix.

Your next question is coming from Matthew Bouley from Barclays.

Just given all of the, of course, interest rate volatility these past several weeks, I'm curious. Number one, given what you're doing with rate buy-downs, are you finding that sales pace is reacting quickly to these sort of numbing moves in interest rates? That's number one. And number two, I guess, just any color on your own sales pace into October and November, how you're kind of thinking about seasonality of orders here in the first quarter?

As you know, we don't report on sales – forecast on sales, but we are pleased with our sales thus far into October. And you certainly see fluctuations in traffic when we see the kind of moves that we've seen over the last couple of weeks, both up and down in rates. But with our ability to hold stable rates through our interest rate incentives, we've been able to convert pretty consistently with the buyers that we've had out there. But any time you have fluctuations in rates, we're going to see people pause for a period of time until they settle into the reality of what they can afford.

We're also going into the seasonally slowest time of the year. So November and December typically are the slowest sales months as you get to the holidays. So, we're going to continue to focus ourselves on meeting the market, but not making any drastic adjustments to our business plan, and we're going to wait and see how the spring unfolds and make sure that we're continuing to start houses going into the spring.

Secondly, on the rental side, I know you're not guiding the top line in 2024. You did mention that multifamily units would be – I think you said, would be rising in 2024 year-over-year. Clearly, there is a lot of supply coming online, I think, in the multifamily world broadly. What can you say around the margin side and what you might be expecting on the margins of those multifamily unit sales next year?

I think we will see probably margins compress a bit on those multifamily sales just if interest rates have come up and cap rates tend to come up. The question of how much supply is out there is really specific to a given project in a given submarket that that project serves. And our team has done a great job of looking at those submarkets when we made the decision to move forward with the projects, cognizant of what was available in the marketplace, both ahead of us and behind us from a supply perspective. So we feel pretty good about being able to deliver into a healthy demand environment. We're still seeing good lease-ups in our rental properties, in line with expectations. So we're very encouraged by that.

Your next question is coming from Alan Ratner from Zelman and Associates.

First off, congrats to Paul and David, and good luck with the transition. Second, I think the topic that we get the most questions on are the sustainability of the rate buydowns that you guys are offering and the industry is offering right now. I guess my question to you, and I hear through – I listened through some of your comments on the puts and takes on margin and lot cost inflation starting to accelerate and maybe stick and brick costs also inflecting higher again after being a good guide this year. Is there a point where you look at your margin, which, obviously, it's very healthy today, but a point where it becomes harder to continue buying down that rate 100 basis points, 150 basis points, and what is that threshold for you?

We're going to operate the neighborhoods, but focused on return as usual, Alan, and it's going to be a pace and a price conversation continually. And the rates buy-downs, the incentives that we offer, it's just part of the mix of the cost environment that we deal with. And while we've seen some nice relief in the stick and brick cost, we have had some price pressure on other sides of it, but fuel prices have come down. That should give us a little bit of relief across a pretty broad spectrum of commodities as well as delivery costs. So it's a constant give-and-take on the cost and the margins. And our primary focus and guiding star is returns.

And we're going into the year with a very strong start. We did say that our gross margins are expected to decline in Q1, but we're coming off a 25.1% in Q4, which is below the peaks that we achieved last year. But it's still a very healthy gross margin that gives us some room to meet the market and maximize returns and still post very healthy returns.

Makes sense. Absolutely. The starting point is certainly very healthy, Jessica. So I appreciate that. Second question, would love to hear your thoughts on just credit availability in general. On one hand, I think there's certainly a nice tailwind to the public builders given your balance sheet and access to liquidity and capital and the ability to use that to take market share. On the other hand, your suppliers and your trades are certainly dependent on credit availability to fund their businesses, and headlines out of the Fed report yesterday, obviously, point to continued tightening there and your land developers probably are dependent on bank credit as well. So in your conversations with trades and suppliers and developers, are you starting to see any indications of stress throughout the channel as a result of credit tightening? And on the flip side, are you seeing any opportunities come from that?

I think anytime you see rates like they have been in the capital markets, a bit in flux, then we're going to see some headwinds from our developers, from less capitalized builders. And it will create some opportunities, but we feel like we've got a good plan and open communications with our vendors, our trades and our lot suppliers to continue to work through those processes.

Your next question is coming from Anthony Pettinari from Citi.

Congratulations on the transition to David and Paul. I'm wondering, understanding your entire offering is fairly affordable, I'm wondering if there's a specific buyer type you're seeing as kind of best positioned to weather higher for longer rates. Are your move-up buyers meaningfully outperforming first-time buyers? Are you seeing more buyers move down market to more affordable offerings? I'm just wondering what you're seeing there and if you're making any sort of strategic shifts to target a different mix of buyers.

I think our buyers are focused primarily on affordability. And for us, the way we deliver that affordability is through the monthly payment process. And that's obviously been a big driver for the rate buydowns, but also introducing smaller product footprints. De-amenitizing some of the homes a bit and letting people do things to improve their homes after the closing when their financial position perhaps has changed and they can afford a little more. But it's continuing to hit a price point relative to median income, so that we can find a place to work in that family's budget.

And we still really like over half of our business being first-time homebuyers because despite what's happening with interest rates, those buyers need a place to live. They don't already own a home, so they're not a discretionary buyer. They're in the market looking at buy versus rent opportunities. So, if we can stay competitive with the rental market on that front, we're going to continue to capture first-time homebuyer market share.

Just following up on something Mike said, I think this time last year, you elected not to give very detailed full-year outlook for 2023 with the volatile rate environment. I guess big picture, can you talk about what is giving you confidence to provide more detailed guidance now with mortgage rates near 8%? Is it just the experience of kind of managing through higher rates and the success of the buy-down? Or are you seeing something different with the consumer? Just wondering how you could contrast where we are now versus 12 months ago?

I think 12 months ago, we were facing two big issues. We were still trying to solve the production supply chain challenges and our cycle times were very elongated. So we had a hard time determining exactly what homes we're going to finish and deliver. And that was also a big interaction with the rate buy-down process because we can only buy rates down for certain forward amount of time in a cost-effective manner, and so being able to pinpoint when those homes would deliver into the buy-down environment. You touched on the second point with the rates. Yes, we start facing some rate uncertainty and increases, but we have been able to manage through that over the past 12 months, and the team has delivered a really strong year.

Your next question is coming from Ken Zener from Seaport Research Partners.

I'd like to take a step back just to bridge three CEOs, if we could here. So it was 10 years ago – David, congratulations – that you got on the call. At the time – and it's going to be about margins. Don talked about at the time 20-10-10, so 20% gross margin, 2 turns. David, as we all recall, when you came on shortly thereafter, Express, obviously, a great product. And you guys pulled gross margins down to – guidance in the 19%, 21% focusing on asset turns, consistent with Don's comments, and it's been great. Now, Paul, I certainly want to give you a chance to give your fingerprints on this. Could you comment on those prior – well, CEOs' comments, why it's different today and perhaps tie that into your to top rising comments on your exposure to non-top 50 markets. That's my first question.

Well, the team that's at the table is a team that was at the table last quarter last year and the prior several. We have a great position and are aligned as a company, not just from this group, but with our regional leadership and our division leadership. And we have continued to focus on returns community by community. And we have the benefit now of a wider footprint across the geographic area that we've expanded on, which is going to continue to provide strength for us and supply as we continue to expand in those markets. So the short version is we feel really good about where we are. I don't feel the need to put a stamped footprint or fingerprint on something unique and different because we have a strong team and a great operation in play, and a good playbook that we are executing on every day.

Ken, I was going to try to stay off this Q&A. Everything – you go back 45-year history, the goal of the company is to be the low-cost provider of affordable housing and create opportunities for first-time homebuyers to get in a home. And everything we've done through those years has been to position the company a little bit better and a little bit stronger. And the awakening of 2008, 2009 and 2010, I think, created a discipline in operations that made the transition from margin to return pretty much an industry standard today. You listen to other builder calls and everybody is talking about returns, cash flow, deleveraging and derisking their land pipeline. I don't see that changing. The industry has matured, the market share consolidation by the publics, the difficulty of putting lots on the ground, the difficulty of building houses, restrictions on capital, all of those things are forcing a discipline on the industry and allowing the – what I think the national builders to gain market share quarter after quarter after quarter after quarter. So our internal focus is going to continue to be project by project, driving improvements to efficiency, simplifying product, making it – even as overall individual component price increases, the availability of housing to the first-time homebuyer continues to be there. So that's our goal. That's all we think about every day. And I think, earlier, somebody said something about sustainable. Everything we do, if it's not sustainable, we leave it in the trash pile and move on. So scalable, sustainable, consistent, and transparent. That's this team that's built alignment throughout our company, and I don't see that changing. Paul will do things differently than I do. He's taller than I am. That's a good thing. Coming down the ladder, I feel very good about the position we're in. Never been as well-positioned as a company.

Yes. I can see Paul was taller. I was watching some of his YouTube videos. I guess not everybody is focused on returns as you. And I would say that you're – I'm sorry. So focused on returns, I'd like you to expand on your comments that – if you're taking down – 54% of your options are finished, is that a fair basis for your mix of closings coming from finished lots? And are those geared more toward the non-top 50 markets, which is about a third of your closings?

So to the first part of your question, we're over 60% of the houses that we're closing today were developed this past fiscal year on a lot developed by a third party. So the 54% is kind of a minimum that we would expect to take down finished because in a lot of cases, as you likely recall, industry practices for – we have hundreds of land professionals across the country that are very good at what they do. So they'll go out, source the land, negotiate it with the land seller, put it under contract and then we'll go find a third-party developer. So in a lot of cases, some of that stuff and the other 45% that we maybe today has not identified who's going to develop it. By the time we bring it on our balance sheet, it will be from a third party. And then in terms of the markets where we're buying more finished lots versus not, do you expect that to skew?

No, I don't expect that to skew. Ken, we continue to build our developer partnerships in all markets. And I would expect that, over time, you'll continue to see a rise, not a reduction in the number of lots we buy fully developed as we derisk our balance sheet and our lot pipeline.

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

My first question is around the community count growth. Any thoughts there on how we should be thinking about that for 2024? Is something in that mid to high single-digit range as you talked about in the past still a reasonable goal?

On a year-over-year basis, Sue, yes. I think we would expect – as we look at fiscal 2024, we've driven a lot of increased absorption out of our communities for quite some time now. And so we're shifting to some of that growth now coming from just incremental community count and continuing to expand our footprint. So I think mid to high single is a good base case. We don't specifically guide the community count for a reason. It's pretty hard to predict just because there are so many moving pieces to communities coming on and offline, but I do think that's a reasonable base case assumption that we'll obviously update as we move throughout the year if necessary.

It's been the goal of ours to consistently repurchase shares over time and grow that over time. And so, this is just another step in that progression. And in the business, as we see I'd say, increased visibility and confidence in our ability to generate cash flow into fiscal 2024. That's given us a little more certainty around being able to guide a little more specifically to that growth than we have in the past. As Mike said earlier, a year ago, we were concerned about our production capacity and how quickly we could actually deliver homes. We have more certainty around that today. And so, with that, that gives us more visibility around our cash flow. And so, repurchases, dividends, distributions to shareholders are an important part of our capital allocation. And so, as we're guiding to $3 billion of homebuilding cash flow with $1.5 billion of that going to share repurchase, another $400 million going to dividends, that's obviously a very important part of our capital allocation.

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

I wanted to just follow up on the comments on the lot cost outlook, up 11% year-over-year in the fourth quarter. Is there something that's driving that higher near term? Or is that sort of the run rate we should be expecting as we go into fiscal 2024?

That is our current run rate. It has been inflecting a bit higher. It reflects several things. Obviously, land prices time over a number of years have increased incrementally. But we've also seen significant inflation in development costs and all that includes in that, whether it's the infrastructure costs themselves along with costs from government permits and regulations and requirements there as well as lengthening the time of development. The development timelines have lengthened dramatically, which then adds to, obviously, the costs associated with it. So there has been pretty strong inflation across really all of our markets on lots getting developed. And there's still a shortage of lots out there in the market for builders as well. And so, that is our current run rate. Whether that's going to accelerate further or whether we might see some moderation over time, I don't think we have visibility to that, but we do still expect to see probably stronger lot cost inflation than our other inflation in our stick and brick costs as we go in 2024.

On the rental outlook, there are some signs that rents are coming down. And as you mentioned earlier, cost of capital is higher. How do you think about incremental investments in rental in this current rate environment? Is there a level of rates where you pull back? And if demand is weaker, like how do you handle what you've invested there? Like, would you sell at retail or just continue to rent them out? Just how could you handle that in different rate environments?

We are watching it closely, and we continue to be in the market with stabilized assets. And we just like – as we sell homes, we watch the market closely, look at what demand is and what that pricing is. We don't intend to continue to hang on to stuff and significantly increase our balance sheet. So while we're indicating that we may see some choppiness in margins as we flow through this market, but we still feel good about the demand that's out there, we feel good about our position and the platform and intend to continue to grow the platform and be positioned to do so, but we'll watch it closely in the coming quarters and adjust accordingly.

The strategic value of the platform for us to be a very good multifamily developer is significant as a land user. Being a residential developer, we've done that for a long time. And now going into the multifamily development side, we become a better buyer of land parcels and a better partner for land sellers. And so, strategically, it's a business we're going to stay in, going to continue to scale that business, but we will be opportunistic and responsive to market conditions with what we do.

Your next question is coming from Jade Rahmani from KBW.

Not sure if this was stated earlier, but could you get the percentage of your buyers that are taking some kind of mortgage buy down or interest rate incentive? And secondly, what percentage are taking the full-term buy down?

It's about 60% of our buyers are utilizing some type of rate buy-down and a fair chunk of those – I don't have specific numbers – almost all are permanent 30-year buy-down.

On the rental business, could you talk to a rough ballpark of exit cap rates that – or acquisition cap rates that the purchases of your development assets are looking to achieve?

Sort of be across the board. It's going to vary significantly by market and what the interest rate environment was at the time we made the acquisition. So it's hard to pin it down to any one cap rate or even a relevant range. Because like with many expectations over the life of the project, from cost and rental side, there's a lot of actuals prove different than the assumptions we made that come out. And so, fortunately, we've been able to see some really strong execution by the teams and picking good projects and executing well on those projects, and that's showing up in the results. And we're just going to try to keep working in that direction. But it's hard for me to give you a number of what a ballpark cap rate was at the time we did a pro forma on a deal and when we decided to go forward with it.

And we have been very conservative in our underwriting and expectations for our single-family rental business and making sure that we feel good about it as a for-sale position as well as a for-rent, and underwriting it to the lowest of those guidelines for our operators, so that we aren't stretching on cap rates that are all driven potentially by interest environment.

And our final question this morning is coming from Mike Dahl from RBC Capital Markets.

Congrats, Paul. Congrats, David. I wanted to ask a follow-up about margin, and I appreciate you're not giving full guidance and you're thinking about returns, not margins, but some of the qualitative comments around expectations for maybe a little bit of downward pressure on price, obviously, some potential just mix, outright price pressure, then the added incentives, the lot costs, it sounds like you're bracing for further margin declines beyond 1Q. Is that fair? Or is there any order of magnitude that you can help us with on some of the other moving pieces that you're contemplating around margins beyond 1Q?

I probably wouldn't use the word bracing for. We feel like we're in a very strong financial position to weather whatever we find in front of us, whether it's upside or downside. And we're going to do what we always do, which is continue to adjust to market conditions. We're not in a position to give a full-year guide. We likely may never do that again because margin really is a function of market conditions, and we're going to meet the market week in and week out. And we haven't seen the spring yet, which is the biggest driver of our full-year margin and where we land for the year in terms of gross margins, obviously. So as you alluded to, there are a lot of moving pieces and a lot of that's going to be dependent on what happens in the spring. But if we do find ourselves in a market where we have more downward house price pressure, then we'll also be looking to adjust our cost structure at the same time. In a typical downward house price market, we do have the ability to adjust our cost structure, not in perfectly real time, but we're not going to sit there in a vacuum and just reduce home prices and not adjust the other components that go into our business. So we feel very good. Like I said earlier, where we're starting from, a 25.1% exit rate in Q4 to weather whatever the year looks like and to continue to maximize returns.

Mike, I'm pretty optimistic. We've never been positioned to execute from a product location, lot supply and have gained efficiency through the last two or three years that I think we'll continue on. So I think 2024 is going to be a good year given a lack of some catastrophic event. So it's just – ultimately, in this business, it's about who can produce houses the most efficient at the lower cost and drive the best returns. And we have never been positioned as a company to do that better than we are right now.

No, it's certainly a strong starting point. And then relatedly, just the cash flow strength is also continuing to be unique in this cycle. The $3 billion in cash from homebuilding ops, for the last couple of years, you've had some offsets from the accelerated multifamily or rental operations, some other assets. In the current environment, given what you've already articulated on multifamily, I know you still have a big backlog of under construction, but when we're trying to bridge that cash flow from homebuilding ops down to kind of a true free cash number, anything that we should be thinking about in terms of potential offsets from rentals or other parts of your business? Or do you think the majority of that will actually flow through to free cash?

As we did comment earlier, our pipeline of multifamily deals is growing, and we expect higher deliveries on multifamily. So I do expect our investments on the multifamily side of rental to show an increase in fiscal 2024. The single-family side, I think, is uncertain as to whether that will grow or not. It's going to – we're evaluating that in market conditions and where the rate environment is, as Mike and Paul commented earlier, but do expect some offset on the multifamily side.

Within the build-to-rent portfolio, we have a lot of optionality at various points in the development phases of those projects. As we start development, as we plan, vertical product, start construction, and then decide at the point we're ready with homes, do we go to rent or go to lease, go to rent or go to sale on those, so we can respond almost in real time to what the market is and not take a long duration risk on that asset.

Thank you. This does conclude today's Q&A session. I would now like to hand the floor back to Paul Romanowski for closing remarks.

Thanks, Tom. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first quarter results. I would like to thank David for his leadership, guidance, and support throughout my career. Our company has produced remarkable results during his tenure as CEO, and he has positioned us for continued success. To the D.R. Horton team, thank you for your incredible efforts in fiscal 2023. We are well-positioned heading into the new year, and I look forward to everything we will accomplish together in fiscal 2024.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.