Good morning and welcome to the First Quarter 2024 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Holly and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2024. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K which is 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 later this 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 Paul Romanowski, our President and CEO.

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. For the first quarter the D.R. Horton chain delivered solid results highlighted by earnings of $2.82 per diluted share. Our consolidated pretax income was $1.2 billion on a 6% increase in revenues to $7.7 billion, with a pretax profit margin of 16.1%. Our home building return on inventory for the trailing 12 months ended December 31st was 29% and our return on equity for the same period was 21.8%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 35% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and demographics supporting housing demand remain favorable. Early signs for the Spring selling season have been encouraging. We will continue to focus on consolidating market share and are well positioned for the Spring with 42,600 homes in inventory and our average construction cycle times returning to more normal levels. We expect our housing inventory terms to improve in fiscal 2024 compared to fiscal 2023 and our ongoing focus on capital efficiency to produce strong home building operating cash flows and consistent returns.

Earnings for the first quarter of fiscal 2024 increased 2% to $2.82 per diluted share compared to $2.76 per share in the prior year quarter. Net income for the quarter was $947 million on consolidated revenues of $7.7 billion. Our first quarter home sales revenues was $7.3 billion on 19,340 homes closed compared to $6.7 billion on 17,340 homes closed in the prior year. Our average closing price for the quarter was $376,200, down 2% sequentially and down 3% from the prior year quarter.

Our net sales orders in the first quarter increased 35% to 18,069 homes, and order value increased 38% from the prior year to $6.8 billion. Our cancellation rate for the quarter was 19%, down from 21% sequentially and down from 27% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 14% year-over-year. The average price of net sales orders in the first quarter was $375,800, down 2% sequentially and up 2% from the prior year quarter. To adjust to changing market conditions during fiscal 2023 and into fiscal 2024, we have increased our use of incentives and reduced home prices and sizes of our home offerings where necessary to provide better affordability to home buyers. Based on current market conditions, mortgage rates, and continued affordability challenges, we expect our incentive levels to remain elevated in the near term. 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.

Our gross profit margin on home sales revenues in the first quarter was 22.9%, down 220 basis points sequentially from the September quarter, with 100 basis points of the sequential margin decline related to the decrease in the value of hedging instruments we used to offer below market interest rate financing to our home buyers while the remainder was primarily due to an increase in incentive levels on homes closed during the quarter. On a per square foot basis, home sales revenues were down 1.5% in the quarter and lot costs increased 1.5% while stick and brick costs decreased 1%. As Bill mentioned, we expect our incentive levels to remain elevated in the near term, but with mortgage rates generally declining from the recent highs, we expect our home sales gross margin in the second quarter to be similar to the first quarter. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand and other market conditions during the Spring in addition to changes in mortgage interest rates.

In the first quarter, our home building SG&A expenses increased by 14% from last year and home building SG&A expense as a percentage of revenues was 8.3%, up 50 basis points from the same quarter in the prior year, due primarily to expansion of our operations to support future growth and an increase in equity and stock market-based compensation expense. We will continue to control our SG&A while ensuring that our platform adequately supports our business.

We started 19,900 homes in the December quarter and ended the quarter with 42,600 homes in inventory, down 1% from a year ago and up 1% sequentially. 28,800 of our homes at December 31st were unsold. 9,000 of our total unsold homes were completed, of which 730 had been completed for greater than six months. Our current level of homes in inventory puts us in a strong position for the upcoming Spring selling season. For homes we closed in the first quarter, our construction cycle times continued to improve and we are essentially back to our historical average of roughly four months from start to completion. We will continue to adjust our homes and inventory and start space based on market conditions and expect our housing inventory terms to improve in fiscal 2024 as compared to fiscal 2023.

Our home building lot position at December 31st consisted of approximately 607,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. 39% of our total owned lots are finished and 52% 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 first quarter home building investments in lots, land, and development totaled $2.4 billion, up 3% sequentially. Our investments this quarter consisted of $1.4 billion per finished lots, $740 million for land development, and $270 million for land acquisition.

In the first quarter, our rental operations generated $31 million of pre-tax income on $195 million of revenues from the sale of 379 single family rental homes and 300 multifamily rental units. Our rental property inventory at December 31st was $3 billion, which consisted of $1.4 billion of single-family rental properties and $1.6 billion of multifamily rental properties. We are not providing separate guidance for our rental segment this year due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental closings and revenues in the second quarter to exceed the first quarter.

Forestar, our majority owned residential lot development company, reported revenues of $306 million for the first quarter on 3,150 lots sold with pretax income of $51 million. Forestar’s owned and controlled lot position at December 31st was 82,400 lots. 61% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $270 million of our finished lots purchased in the first quarter were from Forestar. Forestar had more than $840 million of liquidity at quarter end with a net debt to capital ratio of 14.9%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots for the home building industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply, and relationship with D.R. Horton.

Financial services earned $66 million of pretax income in the first quarter on $193 million of revenues resulting in a pretax profit margin of 34.3%. During the first quarter essentially all of our mortgage company's loan originations related to homes closed by our home building operations, and our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 57% of the mortgage company's volume. Borrowers originating loans with DHI Mortgages this quarter had an average FICO score of 724 and an average loan to value ratio of 88%. First-time home buyers represented 56% of the closings handled by our mortgage company this quarter.

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic to support and to sustain an operating platform that produces consistent returns, growth, and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with flexibility to adjust to changing market conditions. During the first three months of the year, our consolidated cash used in operations was $153 million. At December 31st, we had $6.4 billion of consolidated liquidity consisting of $3.3 billion of cash and $3.1 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.3 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at December 31st was 18.6% and consolidated leverage net of cash was 7.8%. At December 31st, our stockholder's equity was $23.2 billion, and book value per share was $69.70, up 19% from a year ago. For the trailing 12 months ended December, our return on equity was 21.8%, and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of approximately $100 million, and our Board has declared a quarterly dividend at the same level to be paid in February. We repurchased 3.3 million shares of common stock for $398 million during the quarter.

Although volatility in mortgage rates and changes in economic conditions could significantly impact our business, for the second quarter we currently expect to generate consolidated revenues of $8.1 billion to $8.3 billion and homes closed by our homebuilding operations to be in the range of 20,000 to 20,500 homes. We expect our home sales gross margin in the second quarter to be approximately 22.6% to 23.1% and home building SG&A as a percentage of revenues to be in the range of 7.5% to 7.7%. We anticipate a financial services pretax profit margin of around 30% to 35% in the second quarter, and we expect our quarterly income tax rate to be approximately 23.5% to 24%. We are well positioned to continue consolidating market share in all of our operations. Our full year fiscal 2024 revenue, pricing, and margins in our home building, rental, financial services, and Forestar businesses will be determined by market conditions and the strength of the Spring selling season in addition to our efforts to meet demand by balancing pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36 billion to $37.3 billion and expect homes closed by our homebuilding operations to be in the range of 87,000 to 90,000 homes. 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 annual dividend payments of around $400 million. Finally, we now expect an income tax rate for fiscal 2024 of approximately 24%. We remain focused on balancing our cash flow utilization priorities to grow our operations, pay an increased dividend and consistently repurchase shares while maintaining strong liquidity and conservative leverage.

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

Your first question for today is coming from Steven Kim with Evercore ISI.

Thank you very much, everyone. I appreciate all your insights. To begin with, could you clarify that you mentioned at the start of the call about 100 basis points of the gross margin being influenced by hedging related to rate buy downs? Also, in your guidance for the second quarter, could you confirm if I heard correctly about expecting 20,000 to 20,500 closings and consolidated revenue between $8.1 billion and $8.3 billion?

Yes, Steve, that's correct. For the second quarter, $8.1 billion to $8.3 billion of consolidated revenues and closing to 20,000 to 20,500 homes. And in terms of home sales gross margin, you're also correct that 100 basis points of the impact was due to the rate buy downs that we've been offering and adjustments we had to make to that position during the quarter on a sequential basis. But what we've guided to for Q2 versus Q1 is relatively flat in terms of a 22.6% to 23.1% gross margin in Q2 versus the 22.9% that we posted this quarter.

Gotcha. And that 100 basis points, is that something that you have done in the past, is that a number that compares I guess, can you give us some sense of what that number has been over the last couple of quarters?

Steve, this quarter is the first time that, that amount has been significant at all. It is essentially adjusting the valuation of our hedging positions that we have in place to offer our programmatic rate buy downs across the country, and it's typically a very small move either up or down. But this quarter, given the significant volatility in rates during the quarter, of course, mortgage rates moved up to 8% in November and then dropped sharply in December, those hedging positions had to be adjusted to reflect that. So it was an unusual situation this quarter. Generally, we don't plan for any significant move one way or the other.

And if you were to exclude that charge, we would have landed in the gross margin that we had guided to for the quarter, that was really the reason that we came in below.

That's really helpful. I'm sure there will be more questions about the guidance, but I wanted to discuss your capital allocation. The mantra for D.R. Horton has been about consistency, predictability, and reliability, and you've excelled in that area. When I consider your overall cash position, it appears you have ample cash available. Currently, you have an additional $3 billion incoming, with just under $2 billion allocated for buybacks and dividends. I'm curious about the remaining $1 billion and how land investment and rental are considered in that. These seem to be two major components. Looking at your land supply, it has been declining for several years, but it has remained flat for about three years now. Do you think you can reduce that land investment further, or is this the level we can expect moving forward? Additionally, can you provide insight into the anticipated growth of your rental inventory over the next year?

Steve, when we look at our land position, we feel that the forward one year's roughly supply of land that we own is important to maintain the production velocity in our neighborhoods. Bringing that down significantly is going to be incremental because it's going to be with more developers providing finished lots for us versus self-development. And I think we're back up to 76% controlled which is up from where it's been in the past few quarters. So we're going to continue to incrementally look to control more land and acquire lots that are being finished by others, but we will still need to maintain a supply of land on our balance sheet, lots primarily on our balance sheet to feed the production. And the rental inventory, we'll probably invest in some during fiscal 2024 to grow that platform. It's getting closer to a good sustainable volume that will produce consistent revenues and profits quarter-to-quarter, but it's still in the growth mode.

And in terms of the overall capital allocation, as you already alluded to, we did guide to the $1.5 billion of common stock. We've got the annual dividend payments of $400 million. We also have a sizable debt maturity that's very early in fiscal 2025 of $500 million in October. So too early to say what we're going to do with that, and we're very focused on maintaining conservative leverage and we'll see as we get closer, but that is something we're going to be prepared to potentially pay out of cash if we don't feel like the market is right to go refi that.

Great. Thanks very much, guys.

Your next question is coming from Carl Reichardt with BTIG.

Good morning, everybody. I want to talk about SG&A for a second. Bill, can you talk about the basis points associated with the incentive comp this quarter? And then you talked about it being also ahead of some growth you're planning. Can you talk a little bit about community count expansion and whether or not this also might be related to some of the new markets you've entered more recently? Thanks.

Sure. Yes. The first factor this quarter, we could point to our 14% increase in our average selling community. So that's obviously a significant increase, and our SG&A is up 14% this quarter year-over-year as well. So that's a bigger move than we have had in a while that's positioning us to be able to provide the increased guidance, and you have seen our market count increase over the last several years. Obviously, we expect in time to achieve some leverage on that. And as we grow our revenues, we would expect our SG&A to come back down to historic levels. But I think we've got a couple of quarters here where we're going to see our SG&A a little bit higher as a percentage of revenues, primarily driven by that. This quarter, we have one additional factor and really, it's just a timing factor in terms of the impact of equity and stock-based compensation. We typically have an amount that we incurred typically in our second quarter or third quarter, but the timing of some grants this year were a little bit earlier into our first quarter. And so there's an amount of roughly $13 million that it was incurred in Q1 of this quarter that typically would be a Q2 or Q3 event.

Thank you for that information. I have a broader question for Paul. Recently, we witnessed a significant acquisition by an international company of a domestic homebuilder. In the past, Horton was known for acquiring both public and private companies, and while you've occasionally explored some deals, I’d like to hear your thoughts on whether acquisitions are still a consideration for Horton. Historically, I know you've focused on organic growth, so given the current market conditions, what is your perspective on this larger issue? Thank you.

Yes, Carl. We are still actively considering acquisitions. Our focus is primarily on smaller tuck-in builders that could enhance our market share in existing markets or provide us with new entry points. However, we also have the option to pursue greenfield opportunities. I do not anticipate any significant large acquisitions on the horizon. The acquisition you mentioned certainly makes sense, and we often discuss the importance of scale and market share, which aligns with our strategy. For now, we will continue to explore available opportunities, but there will be no major changes from what we've been doing over the past couple of years.

Your next question for today is coming from John Lovallo with UBS.

Good morning guys, thank you for taking my questions as well. The first one here is it seems like the first quarter gross margin at least relative to your expectations was impacted by that 100 basis points of hedging that seemingly was not contemplated in the initial guide. So I guess the question is, why would the 2Q gross margin be flattish sequentially if that hit is not expected to repeat and rates have come in a bit?

We sold homes with increased incentives while rates were higher during the first quarter, and some of those closed in December, but there are still several that will be closing in the second quarter. Currently, we are entering the quarter with slightly lower margins than average. However, rates have dropped, so the incentive costs for later sales are somewhat lower. Overall, we expect to maintain margins around current levels, excluding hedging, going forward.

Okay, got it. And then I think last quarter, lot costs were up 10% or 11% year-over-year, but I think there's some geographic mix that was in there and maybe it normalized to up sort of mid-single digits if you kind of accounted for that mix. I mean, how did lot cost trend in the quarter and how are you thinking about that in 2Q?

Pretty similar to what we said last quarter. That was a year-over-year comp. And so we still were up low double digits on a year-over-year basis, and it did continue to have a little bit of geographic mix. But I would say, stripping out geography, our lot cost on a year-over-year basis probably are up high single digits. And until we cycle an entire year, it probably stays that way, and then it would moderate in terms of year-over-year because it's certainly less than that on a sequential basis.

Yes. 1.5% on a sequential basis.

Got it, thank you guys.

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

Good morning everyone. Could you provide some insight on the actual impact of that charge on the P&L, specifically whether it affected revenue deductions or if it was solely a hit to COGS? Additionally, regarding your expectations moving forward, it makes sense that you aren't expecting changes since rates have stabilized. However, is there a way to assess the sensitivity based on what remains in the pipeline? For instance, if there were another drop of 50 to 100 basis points, would that result in a similar 100 basis point impact?

The charge was approximately $65 million, which impacted the quarter. In terms of our outstanding position, we believe it reflects the current market, and the valuation adjustment in the December quarter addresses this fully. There's always some sensitivity involved, and we typically maintain some hedging positions. Therefore, a significant sudden change in rates can lead to some exposure. However, when rates drop, it enhances affordability and boosts our capacity to sell at competitive price points in our core business. Our hedging strategy enables us to consistently offer rates below the market across our operations. We strive to manage this carefully, but during periods of significant volatility, there may be some exposure in our positions.

There were two very significant moves in interest rates in the quarter. They went up significantly in the middle of the quarter, and they came down significantly to the end of the quarter. Kind of a very unique dynamic that we have not experienced. That's what led to the mark-to-market adjustment being more severe than it's been in prior quarters.

And that $65 million mark-to-market is in cost of goods sold, whereas the just standard routine interest rate offering does net against revenue and flows through our ASP. But the $65 million specifically is in cost of goods.

That's all very helpful, thanks for the transparency there. As a follow-up, thinking about the outlook for materials either inflation or deflation can you just speak to what's in your 2Q guide and then maybe just generally, if we're looking at starts rising and your volumes obviously growing, how should we think about the competition for materials perhaps driving inflation again in those?

Yes, we're seeing some relative flatness in our cost side of the business and would expect to see similar all things stay consistent through the next quarter. Certainly, with the encouraging signs early in to January, it's possible that we see some increase in starts from all of our peers. That could put pressure on labor and on materials, which could cause some headwinds or some increase in the cost side.

Alright, thanks everybody. Good luck.

Your next question for today is coming from Michael Rehaut with J.P. Morgan.

Hi, thanks for taking my questions. Good morning everyone. I wanted just to circle back for a moment on SG&A and I think, Bill, you talked about the main drivers of the higher or negative leverage, I guess, you could say, being community count and the stock comp. You're going to see a similar type of negative leverage impact on the second quarter. Would you expect that to kind of flatten out everything else equal seems to imply you said that maybe in the first couple of quarters, you're going to see this impact and that should kind of run through by the time you get to the back half or is this more of a 2025 event? And as part of this question, I'm also curious if higher sales incentives outside broker commissions has impacted this at all or if you could remind us if that's the portion that's in the COGS?

Yes, the last part first. Yes, our broker commissions are in and our gross margins are in our cost of goods sold. So that's not part of the equation. And I think your general commentary there is fair. We only provide specific SG&A guidance one quarter out. But generally, our expectation over the longer term is that we would get back to a similar SG&A level as last year and beyond. So I think it is a phenomenon here for a couple of quarters where we're guiding a little bit higher than last year.

Little headwind on the community count market growth, but a little tailwind in Q2 on the equity comp position recognizing that in Q1 versus Q2.

Also, the average selling price is down compared to last year, which creates a greater challenge for selling, general, and administrative expenses on a percentage basis when average selling prices decline.

I understand your point, and I appreciate your clarification. I wanted to revisit your earlier comments about gross margins, Bill. I'm not sure if you misspoke, but it would make sense if you didn't. You mentioned that we would expect gross margins to return to the levels seen in the first quarter, excluding the impact of hedging. This aligns with our understanding, given that interest rates have dropped over the last couple of months, meaning current orders would reflect less expensive rate buy downs compared to a few months ago. I believe you indicated that the second quarter is currently affected by some carryover from the first quarter. I just wanted to confirm that I understood your comments correctly regarding the current state of gross margins on orders taken in mid-January compared to those from a couple of months back.

Yes. We provided guidance for the next quarter, forecasting a margin between 22.6% and 23.1%. This range reflects the GAAP margin we reported in Q1. As we move into Q2, the closings early in the quarter are likely to be at the lower end of that range, possibly even slightly below it. However, margins are expected to improve later in the quarter due to the lower cost of buy downs following a decrease in rates. On average, we believe this will result in a margin within the 22.6% to 23.1% range. Beyond that, we cannot provide definite comments, as it will depend on the strength of the Spring selling season, demand during that period, and fluctuations in mortgage rates. But overall, that's our expectation for margins in Q2.

And we still sell a large portion of our homes inter-quarter. So 35% to 40% is our kind of historical average. And so those are being sold now and as we look through the quarter and into the Spring selling season. So certainly, as the Spring selling season emerges and continues, it's going to give us better visibility as we look towards the end of this quarter into 3Q.

Great, appreciate it. Thank you.

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

Hey, good morning everyone. Not to beat a dead horse here, but I just want to understand kind of your old philosophy and some near-term dynamics with rates coming below, a little bit below 7%. I realize there's this hedging noise, but have you all been able to kind of pull back on core incentives, if you will, the past several weeks or is this much more taking kind of a bit of a wait-and-see approach, I think you mentioned a good rebound early in the year, are you taking a wait-and-see approach, so you're not disrupting kind of demand or the momentum ahead of the Spring selling season?

Truman, I think that as we look at this today, it's still very early. And for us, consistency of activity has been important. So we haven't made any significant changes in our incentives if the market gives this to us, and we continue to see the early encouragement that we are, then we'll respond to the market in kind. If rates continue to stay up, then we'll need to lift our rate offerings like we've done in the past and will fluctuate as those rates move. Still it has been our best incentive is the rate buy down and consistency of rate, consistency of payment to our buyers as they shop in market.

And all of that continues to be managed market by market, community by community based on what our local operators are seeing and believe it's the best to drive the strongest returns. I mean, even with a little bit of giveback in our gross margin, our improved cycle times and what we're going to turn this year in terms of inventory is way more important to our bottom line and the returns we're going to generate than giving up a little bit of gross margin and still being at roughly 23%.

Makes total sense. And with that, you all bumped your closings guidance a little bit to about 89,000 around there. That's well above the prior peak of, we'll call it, 83,000 back in 2022 when there were all of these supply chain issues and constraints. Could you just help us get a little more comfortable with that level of growth kind of based on today's labor pool, a lot availability. I'm really trying to understand constraints today and maybe what level of closings would really create bottlenecks in the construction process, not asking about demand or anything along those lines?

We've been very focused on creating a quarter-to-quarter consistent starts plan where we're feeding our neighborhoods with lots that are available in front of us and making sure we have those lots supplied and secured to us. At the same time, we've made a tremendous amount of progress reducing our cycle times and coming back to sort of our historical norms of around four months from starting a home to completion. And so that's giving us much greater flexibility going into this year with the strong finished lot position we currently have, combined with the reduced cycle times, we're able to reduce our homes in inventory and still deliver a closing target that's going to be at or in excess of our two times beginning of the year housing terms. So we really feel good about what's happened there. As to what the upside top side is where the bottlenecks would come in, hard to speculate on where that would be. We feel really good about our lot position, neighborhood by neighborhood and the trade partnerships that we have and the supplier relationships that we have, they've been very supportive of us.

But great point, Truman, and that when we think about overall industry constraints, finished lots are going to continue to be an issue in terms of builders being able to put more houses on the ground today. It's not getting any easier to put a finished lot on the ground and so we continue to have a focus on building out our lot position and our relationships with third-party developers to make sure we're positioned for growth. But when we think about the biggest constraints to the industry overall, it definitely starts with finished lots.

Perfect. Thank you all and good luck in the coming year.

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

Good morning. Curious if you can provide a little bit of perspective. You talked about favorable trends into the Spring and 56% first time. Just as you look across the business, in terms of where you're seeing relative strength in regards to price points and product where things are above average and where things are below average?

I think it's pretty consistent across the board. We're feeling really good across all of our offerings. I mean as 55% to 56% of our deliveries have been to first-time homebuyers, that's generally where we've kind of geared our neighborhoods that we're positioning and the product that we're positioning with that. I think 70% of our deliveries were at $400,000 or less, which for us is maintaining a focus on affordability and a payment that works for people in their monthly budget. Hence, we've used the interest rate buy downs quite a bit. But feel really good. Coming out in January does not make a quarter or a Spring selling season, but we're very encouraged by the early trends in January and are excited for what the spring is going to hold.

From a product perspective or price point perspective with lower rates, do you think differently than you did 90 days ago in terms of focus on affordability or do you think about expanding a bit more what you're doing?

I think we have made adjustments as the market has shifted over the last 12 to 18 months and feel comfortable with our trajectory and the product offering that we have. Certainly, as you look across our communities, they're going to trend inside of the product offering that we have based on rate and monthly payment environment, whether that means that they're buying up in size or down in size. But we feel like we have a good offering across our markets, and we'll continue to stay as we need to respond to a monthly payment and interest rates and provide affordable opportunities across all of our platforms.

Great, thank you.

Your next question for today is coming from Alan Ratner with Zelman & Associates.

Hey guys, good morning. Thanks for all the details so far. I got some questions on kind of the spec versus build to order dynamic in the industry right now. You guys being a spec builder, I think, had a pretty strong advantage during the pandemic. Obviously, resale inventory was incredibly tight. The extended cycle time as well, I'm sure it was hard to manage from your side. Kind of gave you an advantage versus the BTO guys in terms of the consumer experience. So I guess my question is now that cycle times seem to be improving across the industry, resale inventory is ticking a little bit higher. Are you thinking about that dynamic any differently, are you maybe contemplating selling earlier in the construction process again, whereas before you were maybe waiting for homes to get closer to completion, are you seeing more competition from build-to-order builders that have kind of shrunk in their construction cycle times, any commentary on that would be great?

I think today, we are still seeing people looking for closing with certainty of close date and in that 30 to 60-day time frame based on their ability to lock in interest rate. And so I don't know that we've seen much significant shift from the build-to-order builders being able to deliver a presale into those time frames. We are very comfortable with our inventory position, both in the total homes and in a completed home scenario. It's continued to play into the shortness of resale inventory across our markets and I don't expect a significant change for us. We're going to continue to stay focused on inventory sales and consistent production community.

Even with the decline in existing home sales, they're still three to four times larger of a market transaction volume than new home sales. So we've always tried to position ourselves to compete against those homes rather than just other new home providers.

The timing of that sale has been able to move up earlier in our stage of construction just because we have gotten back to our historical norms of months of delivery of our houses.

Got it. But in terms of your sales strategy, I mean, I look at your completed spec count, it's been ticking a little bit higher here more recently. Is that still kind of the strategy to hold these homes off until you're maybe a month or two from completion to allow the buyer to lock in that rate or are you maybe thinking about kind of pulling that forward a little bit?

We're not restricting the sale of homes. You'll notice the completed spec inventory and completed home inventory will increase through the fall, positioning us to have houses ready for quick deliveries starting in January for the Spring selling season. This allows us to meet buyer needs quickly within 30 or 60 days. Additionally, due to the shortened cycle times, we are comfortable selling and securing a rate for buyers earlier in the production process compared to last year.

Okay, got you. One last quick one, if I could. Just going back to the charge on the hedge, I just want to better understand this, like we have heard from other builders in the past situations where they would buy kind of forward commitment pools and when rates pull back sharply in a short period of time, those pools would kind of go unused because the market kind of fell below wherever that pool was. Is that kind of what's going on with you guys or are the mechanics of this much different, I'm just trying to wrap my arms around that better?

No, you've described it exactly. We typically will buy those forward commitment pools really for the next few weeks of deliveries essentially is the plan. We're not going out very far, but it is a few weeks and so that's when we say a very sudden sharp change in rates, that can present some exposure there, but it has not occurred in the past, but the circumstances this quarter were pretty unusual in terms of the significance and the suddenness of the rate moves.

And it was really restructuring so it could be used, not that we weren't going to fulfill the pool. We just had to restructure it so it was usable.

And then at the end of the quarter, we always have to mark-to-market the value at the end of the quarter. So that's always a factor there as well.

So it sounds like this is an industry phenomenon, not necessarily an important phenomenon, but obviously, we'll learn more about that in the next few weeks. But I appreciate that. Thank you.

Your next question is coming from Anthony Pettinari with Citi.

Hi, good morning. There was an earlier question on the large builder acquisition we saw last week. I guess we also saw a large acquisition in SFR. And I'm just wondering if you could talk about how institutional demand for build-to-rent homes has been trending, maybe relative to earlier expectations. Do you expect that to grow as a portion of your homebuilding operations and just maybe the impact of that business in this kind of rate environment?

Certainly we have seen that with the change in the capital markets, that demand environment became much choppier last year. But we still had institutional buyers that were anxious to get the product we were delivering to the market, and they continue to be so. We delivered projects in the first quarter, we expect to deliver more in the second quarter and then throughout the year with the pipeline that's there. I mean, for us, it's a strategy to help us derisk land positions and more rapidly monetize our land portfolio. And so we are still seeing good demand for the product, good demand on the rentals and the lease-ups when we're taking the stabilization process on and continue to expect that to become a growing part of our business.

Okay, that's helpful. And then just last quarter, I think 60% of your buyers took some form of a buy down and you were offering 6.25 on a conventional loan. Just wondering if you can update where that stands coming out of fiscal 1Q and I guess you talked about this earlier a bit but do you think about kind of a rate level where buy-downs maybe stop becoming kind of the chief incentive mechanism or where incentives start to shift back to more kind of traditional ones?

We're probably up, call it, roughly 10% sequentially in terms of the take rate on that buy downs. So we were in the 70s and now we'd be in the 80% range of the buyers that utilize our mortgage company. So the 60% you said was on our overall business, so say 60% to roughly 70% of buyers took that this quarter.

And the use of those rate buy downs is not just new to us over the last 12 months. We've been 24-plus months utilizing that incentive. So I believe on a go-forward basis, staying competitive to not only the new home market, but especially to the resale market for us, and the ability to have a lower monthly payment for same cost of home is advantageous. So we have no plan in the near-term to stop utilizing it even if we see rates shift down.

Okay, that’s helpful. I will turn it over.

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

Good morning everybody.

Good morning Ken.

I wonder, with the industry, everybody likes to focus on the income statement, right. So the gross margin has obviously been a focus today. However, your initial comments were about inventory returns, which together gets you returns on inventory. So because you took up volume for the year modestly and all we see is one quarter forward guidance, is it fair to say that you guys' internal metrics are generating the same or higher ROI than you had started the year at, I know you kept the $3 billion cash flow the same but I'm just trying to understand we see one part of the business, but not necessarily the output of the other?

Sure, yes. I mean our returns are in line with our plans, and our divisions are out there executing on their plans, their start plans week-to-week, month-to-month and deliver the homes that we expected to this quarter, plus a few hundred more. And so as we enter the Spring, we're continuing with that and very consistent with our expectations from an inventory turn standpoint and a return on our assets, our investments in inventory.

You mentioned improving cycle times, which is a part of the discussion. In the past three years, the starts have varied significantly, moving from 14,000 to 25,000. Can you elaborate on this? Do you see any seasonality or factors affecting these numbers, such as orders or a specific plan to meet your closing targets? Additionally, what do you anticipate your inventory units will be by the end of the year based on your current assumptions? Thank you.

Yes, Ken, as you look at our past year plus starts space, it has been inconsistent and a lot of that has been in response to the market, in response to the elongation of cycle times and then further reduction of cycle times. As you look at our inventory today and our guide to basically turn a little more than two times that inventory, we can expect to see consistent and sustainable starts expansion over the next few quarters. We want to maintain the level of inventory that we have and be in a position as we respond to the Spring selling season to stay consistent with our starts, but we do need to grow our starts consistently quarter-to-quarter over the remainder of the year.

And as we consistently look to position ourselves to grow, we would certainly love one position ourselves to grow fiscal 2025 over fiscal 2024. So we would expect our inventory at the end of the year to be a little higher than it was at the start of the year with the expectation of turning it a little more than two times in fiscal 2025.

Thank you.

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

Thank you. Good morning everyone. I wanted to talk a bit more about thinking of the competitive dynamics on the ground. As you think about some of the smaller new home markets that you have recently entered and the potential for more existing home turnover to perhaps come through as we move through the year, any thoughts on what those competitive dynamics could mean for you in various markets and perhaps how you're positioned relative to that?

I think, Susan, that we're continually looking to provide affordable homes that hit a payment that's going to work in the monthly budget for our buyers. And that is what's oftentimes overlooked, especially by the smaller markets, a lot of the builders that are currently existing have capital constraints on what they're able to build and start. And so they're looking generally to maximize revenue per lot or margin per lot and go with the lower volume. And so they're leaving that first-time homebuyer, that family that needs a more affordable home, kind of not really their target. So that's the target customer we seek out and we see good results when we go into a new market, greenfield a new market and focus on the affordable price points.

Okay, that's helpful. As things have normalized, what level of cash are you comfortable holding on the balance sheet today, and how do you view the possibility of increasing buybacks or allocating capital to other growth initiatives while you continue to strengthen the balance sheet?

Based on the current size and scale of our business and our ongoing inventory production, our cash balance is where we want it to be. We have sufficient cash across our business segments and access to our credit facilities. Our goal is to maintain this level and gradually increase it as we grow. This year, we have plans to enhance our share repurchase program for fiscal 2024 by 25%, raising it from $1.2 billion to $1.5 billion. This aligns with our commitment to consistent shareholder distributions, including an increase in our dividend to $400 million this year compared to last. As we continue to grow the business, we aim to incrementally boost both our repurchase and dividend levels.

Okay, thank you and good luck.

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

Hi, good morning. It is Reese. Thanks for taking my questions. Just on the outlook that for an improvement in build cycles in 2024, can you talk about where your build cycles are now where they were last quarter, how much do you think that can improve, and then like what gets you there from a supply chain perspective?

We were just over four months this quarter, Reese. And when we think about our historical norm, it really is right at that four months in terms of start to complete, and then there's an additional time from complete to close. That's down from seven months a year ago. So a very substantial improvement in terms of year-over-year basis. Sequentially, it improved by about 10 days. So when we think about further improvements from here, they're not large moves, they're just continued improvements on average. So where hopefully, we can get below four months but that's not something that we expect to drive from 4 to 2.

Got it, thank you. That's helpful. And then I just wanted to follow up on the comment that you're seeing encouraging signs as we head into the Spring season. Can you just give a little bit more color on what you're seeing, is that better home buyer traffic or conversion, and do you think that's just driven by sort of the headline rate number that's coming down, just want to understand what you're seeing that's encouraging in the market.

I think there's lots of reasons people are out looking for houses, but ultimately, they need a house, and we're seeing both good traffic and good convergence early in the Spring. And so we have set up operating plan for the year. And so far, we feel really good about how the market is responding to that.

Your next question is coming from Matthew Bouley with Barclays.

Okay. In terms of the land market, are you seeing a pickup in land development into 2024, I know that you said that things can kind of get a little bit more crunched as the demand increases. How are you thinking about land development costs and lot costs moving higher and kind of offsetting that?

For us, we are set in terms of our consistent delivery of loss into our starts plan. And so that plan is in place for us as we look 12 months out. We have not seen much reduction in development costs and wouldn't expect with the shortness of lots across the industry that we're going to see, and we're not anticipating much reduction in either the labor side or the supply side, product side of the components that go into developing lots. But we have a plan that we have stuck to and are consistent with, we feel good about our lot position in the near term and as we look next year or two out.

Thank you. Regarding affordability, aside from rate buy-downs, are there other factors that buyers have responded to in terms of making payments more manageable, or have there been any changes to those strategies?

Product selection, generally, they'll buy a smaller home to make the payment work. And sometimes that's within an existing neighborhood or moving to a different neighborhood that's offering a smaller set of plans.

So our square footage was down again about 3% year-over-year. It was relatively flat sequentially, but we would expect just continued gradual moves down from a mix shift perspective in terms of average square footage.

Thank you very much.

We have reached the end of the question-and-answer session, and I will now turn the call over to Paul Romanowski 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 second quarter results in April. Congratulations to the entire D.R. Horton family on producing a solid first quarter. We're proud to represent you on this call and appreciate all that you do.

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