Good morning and welcome to the Second 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. 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 financial results for the second 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 and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to Paul Romanowski, our President and CEO.

Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion with a pre-tax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9%, and our return on equity for the same period was 22.2%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well-positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving. We continue to focus on capital efficiency to produce consistent, strong homebuilding operating cash flows and returns. Mike?

Earnings for the second quarter of fiscal 2024 increased 29% to $3.52 per diluted share compared to $2.73 per share in the prior year quarter. Net income for the quarter was $1.2 billion on consolidated revenues of $9.1 billion. Our second quarter home sales revenues increased 14% to $8.5 billion on 22,548 homes closed compared to $7.4 billion on 19,664 homes closed in the prior year. Our average closing price for the quarter was $375,500 flat sequentially and down 1% from the prior year quarter.

Our net sales orders in the second quarter increased 14% to 26,456 homes and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year-over-year. The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term. Our sales continue to be primarily from homes under construction and completed homes and 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 second quarter was 23.2%, up 30 basis points sequentially from the December quarter. On a per square foot basis, home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot costs increased 3%. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season in addition to changes in mortgage interest rates and other market conditions. For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter.

In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business.

We started 24,900 homes in the March quarter and ended the quarter with 45,000 homes in inventory, up 3% from a year ago and up 6% sequentially. 27,600 of our homes at March 31st were unsold. 7,300 of our total unsold homes were completed, of which 790 had been completed for greater than six months. For homes we closed in the second quarter, our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to completion. We will maintain a sufficient starts pace and homes and inventory to meet demand and continue consolidating market share. Mike?

Our homebuilding lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land, and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development, and $230 million for land acquisition.

In the second quarter, our rental operations generated $33 million of pre-tax income on $371 million of revenues from the sale of 1,109 single-family rental homes and 424 multifamily rental units. Our rental property inventory at March 31st was $3.1 billion, which consisted of $1.3 billion of single-family rental properties and $1.8 billion of multi-family rental properties. We are not providing separate annual guidance for our rental segment 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 revenues in the third quarter to be similar to the second quarter.

Forestar, our majority-owned residential lot development company reported revenues of $334 million for the second quarter on 3,289 lots sold with pre-tax income of $59 million. Forestar's owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar. Forestar had approximately $800 million of liquidity at quarter-end with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding 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 $78 million of pre-tax income in the second quarter on $226 million of revenues, resulting in a pre-tax profit margin of 34.6%. During the second quarter, essentially all of our mortgage companies' loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 80% of our buyers. FHA and VA loans accounted for 59% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 89%. First-time homebuyers represented 57% of the closings handled by a mortgage company this quarter.

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic 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 the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at March 31st was 20% and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders' equity was $23.8 billion and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31st, our return on equity was 22.2% and our consolidated return on assets was 15.1%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million and our Board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter and our fiscal year-to-date stock repurchases were $801 million.

For the third quarter, we currently expect to generate consolidated revenues of $9.5 billion to $9.7 billion and homes closed by our homebuilding operations to be in the range of 23,500 homes to 24,000 homes. We expect our home sales gross margin in the third quarter to be approximately 23% to 23.5% and homebuilding SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pre-tax profit margin of around 30% to 35% in the third quarter, and we expect our quarterly income tax rate to be approximately 24%. Our full year fiscal 2024 revenue, pricing, and margins will be affected by market conditions and changes in mortgage rates in addition to our efforts to meet demand by balancing sales pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36.7 billion to $37.7 billion and expect homes closed by our homebuilding operations to be in the range of 89,000 to 91,000 homes. We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations. We now plan to purchase approximately $1.6 billion of our common stock for the full year in addition to our annual dividend payments of around $400 million. Finally, we now expect an income tax rate for fiscal 2024 in the range of 23.5% to 24%. We are 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. Paul?

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.

Thank you. The floor is now opened for questions. And the first question this morning is coming from Carl Reichardt from BTIG. Carl, your line is live. Please go ahead.

Thanks. Good morning, everybody. I wanted to talk about Florida. It's a pretty important market for you all. The long experience there. We've seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there, maybe the various markets within Florida and how it feels to you right now?

You know, Carl, Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So we haven't seen a significant increase for the homes in the communities where we sell as you may see reported along the coastal and high wind zones. Still seeing good in-migration and good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula.

Right. Thanks. And then a follow-up on multi-family and single-family for sale, that portfolio business. With some lumpiness there, I'm curious about the markets where you've got fairly good-sized operations in multi-family and single-family rental, one of the reasons for you entering and playing more significantly in that space, I think, is scale benefits for the overall homebuilding operations. So if you think about the markets where you're big in those two businesses, are you seeing lower overall vertical costs for the homebuilding operation too or better margins? And maybe sort of expand a little bit on that particular element of the business? Thanks.

I think there's two big factors that drive into our push into the rental business. One is, we're a better buyer of land, a better user of land and that we're able to convert more of the land to its ultimate final use. So we're a better counterparty to a lot of sellers as we can deal with the build for rent and multi-family component as well as the residential for sale. That gives us some economies in the purchase of the land and efficiencies in the entitlement process. Certainly within the vertical cost structure, we've probably seen more ability to influence cost on the traditional multi-family side coming over from our homebuilding operations because we're much bigger buyers of parts and pieces that go into the structures than a traditional multi-family developer.

Okay. I appreciate it. Thanks all.

Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead.

Good morning, everyone, and thank you for taking my questions. My first question is about the market's concerns regarding the unexpectedly persistent CPI. Although long-term mortgage rates have only increased by about 35 basis points since the CPI report, I would like to know if you have noticed or expect to see any changes in demand or in your incentive activities due to this movement in rates.

We expect to continue to meet the market and we continue to stay focused on incentives that drive that activity and interest rate buydowns has been a big portion of what we have done. We tend to move with the market. So as you've seen that increase in market rates, we will move up the rate buydowns to be about a point to a point and a half below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today.

Understood. And maybe splitting gears slightly here, but you guys beat deliveries versus your outlook in the quarter by about 2,300 units at the midpoint, raised the outlook by about 1,500 units at the midpoint. I mean, was there some pull forward in the second quarter or is there some conservatism in this outlook or maybe the expectation that delivery pace could moderate to some extent? I mean, how should we think about that?

Yeah, great question, John. We did go into the quarter with a significant number of completed specs. So we actually sold and closed intra-quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So we still have over 7,000 completed specs. So I do think you'll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter. But that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000. And we're now back to normal, if not better than our historical inventory turns in terms of what we're guiding to at the high end, it would be a roughly 2.2 times turn. So feel very good about the ability to take that range up, but don't think there is necessarily an opportunity for the same scale of beat next quarter.

Yeah, makes a lot of sense. Thank you guys.

Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen your line is live. Please go ahead.

Thanks very much guys. Strong quarter. I appreciate all the guidance thus far. I was curious if you could shed a little bit more light regarding your cash flow guidance. You mentioned about $3 billion from homebuilding specifically, but you do have other segments, you have the rental segment, and you have Forestar in particular. And I was curious as to what kind of an offset should we expect from rental or Forestar this year relative to that $3 billion from homebuilding? And then specifically with rental, you have about $3.1 billion in inventory value right now. Where do you think that's going to go over the next, let's call it, 12 months or so?

Sure, Steve. On our cash flow guide, we have been guiding to homebuilding cash flow because that has been the primary generator of cash for us over the last couple of years. And we have invested portions of that into the rental operation as well, which feeds to the consolidated cash flow from ops. So there is some offset versus the homebuilding cash flow this year. We're guiding to around $3 billion of homebuilding cash flow. I would expect in the $800 million to $1 billion range, probably offsets that for the full year this year on consolidated. But we do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to moderate. And so we would expect going forward, our consolidated cash flow and our homebuilding cash flow to be much nearer to the same number beyond fiscal '24. So with the rental platform asset growth moderating, we're at 3.1 today. We do still expect to see that grow a bit further this year and will grow slightly next year, primarily from the multi-family platform. Our multi-family platform continues to grow and we're building out a more elevated level of starts over the last couple of years. But that will probably late '25 start to moderate as well. And so we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here into '24 and into '25.

Okay. That's helpful. Appreciate that. And then with respect to uses of cash, I think as always, you talk about the opportunity for growth and your market share across the country, it still leaves some room there. And so I wanted to ask about your community count. You were up 4% month-to-month, up 15% year-over-year. That's an area where a lot of other builders have struggled. And I'm curious if you can provide a little bit of granularity into how much you expect there is further opportunity for growth this year in your community count and what you generally target for the next year or two in terms of community count growth.

Sure, Steve. We've been up a double-digit percentage on a year-over-year basis for community count now for several quarters. So we've probably got at least another quarter or so until we've cycled and anniversary that and would expect the growth to moderate a bit. But as we look at our overall lot position and our positioning for the future to continue to drive growth, we have shifted to a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community. So I do think you'll continue to see our community count grow. It just probably won't continue to be at the double-digit percentage year-over-year increase here in a quarter or two.

Okay. Got you. So like more like kind of like a high single-digit kind of rate is what you're talking about, right?

Yes, mid to high.

Okay. Got you. Appreciate it. Thanks very much, guys.

Thank you. Stephen.

Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew, your line is live. Please go ahead.

Good morning, everyone. Thank you for taking my questions. I wanted to inquire about the pace of starts going forward. Assuming we are in a mid to high sevens mortgage rate environment, is there a situation where you would reduce production to help with price or margin? In other words, is there a mortgage rate at which you would consider scaling back on starts? Thank you.

I think we're going to manage the starts pace at a community-by-community level based upon what we're seeing with buyers in the market and how they're responding to the current interest rate environment and mix of incentives that we're offering. Traditionally, we've had a limiter for the past several periods on lot supply in terms of what we could actually start. So as we're seeing our lots get developed and brought online, we're able to bring good production starts into the market. I think we started just under 25,000 homes in the quarter. And we probably expect that to continue into the June quarter as if we see continued absorptions and sales.

And so with our gross margin currently over 23% and very solid, it would take a pretty big disruption in the market for you to see us have a broad-based pullback in starts. As Mike alluded to, it's going to be just driven on a community-by-community basis like it always is based on our finished lot position and what makes the most sense to maximize returns at that individual community level. So as we see right now, without another big shock or any sort of big shock to the system or a more significant move in rates, I think we would expect our starts to be pretty consistent through the remainder of the year.

Got it. Very helpful. Secondly, I wanted to ask around credit and DTI metrics, particularly for your first-time buyers. Are you seeing any sort of incremental signs of stress in your mortgage applications just given this affordability backdrop? Thank you.

No, we've seen a pretty solid level of qualified buyer. Our average FICO score this last quarter was still at 725. And with the low level of inventory and available homes to purchase out there, you know, we still see strong buyer demographic and demand and we've remained pretty consistent. We have seen fluctuation in rates, but they've really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify.

Great. Thanks, everyone.

Thanks, Matt.

Thank you. Your next question is coming from Michael Rehaut from JPMorgan. Michael, your line is live. Please go ahead.

Thanks. Good morning, everyone. I wanted to explore the demand trends from the last couple of months. I understand you usually don't provide too much detail on a month-to-month basis, but given the recent rate changes and market concerns, could you share any insights on the progression from January through April? I've heard that March and April might be somewhat more moderate compared to February. I would appreciate your perspective on how demand trends have evolved and whether the sales pace has aligned with your expectations, including any changes in incentives in the marketplace.

Sure, Mike. At the end of our first fiscal quarter in December, we experienced better than usual seasonality in sales demand, which carried into January. During our January call, we noted that the seasonality was still slightly better than normal. However, as we've discussed previously, volatility in rates leads to an adjustment period for buyers. In February and March, we observed increased rate volatility, resulting in some sporadic adjustments from buyers that impacted weekly sales pace. Over the past six weeks, we've seen that stabilize, and we are now experiencing a solid sales pace that aligns with our overall plans. This progress has allowed us to raise our guidance for the year. Moving forward, as Jessica has mentioned multiple times, our outlook will depend on what happens with market rates. In the last week, we've encountered more volatility, so we anticipate ongoing adjustments in the market as the rate environment continues to evolve.

Thank you, Bill. I appreciate that. In relation to the effects of higher rates, it seems that your guidance from last quarter had a bit of a surprise regarding the gross margins for the out quarter, which were lower than expected. This appears to align with the elevated levels of rates and incentives observed in the third calendar quarter. While you haven't provided guidance for the fourth quarter, I'm curious if you might be experiencing some delayed effects from potentially higher and more costly incentives, particularly with some warehouse buying and the impact of mortgage rate buydowns being deferred. If we maintain the current levels and consider that the buydowns could be a bit more expensive, would this impact be more pronounced in your fiscal fourth quarter compared to the third quarter?

I think right now, Mike, with the number of homes that we're selling and closing intra-quarter, you're seeing a pretty good real-time average gross margin. And so unlike a lot of other builders, I think you'll see more real-time market conditions show up in our results faster. Hard to say split in hairs between Q3 and Q4, but we were really pleased with where our gross margin came in this quarter. And we actually did see an increase in the number of buyers sequentially that we're able to utilize a mortgage rate buy-down. And in spite of that, we had a slight tick-up in our gross margin. So without giving specific guidance for the remainder of the year because it is going to be dependent on the interest rate environment, it feels pretty good to us right now. Our costs outside of incentives have generally flattened out on the stick and brick side. We're still having some categories go up where we have pressure, but we've had some success getting categories to go down. We obviously do still have some lot cost inflation we would expect to continue to need to be able to offset. So when we think about really predominantly the next two quarters, it is going to be incentive as the wildcard and it's going to be dependent solely on market conditions.

But I think to clarify, given that rates have increased and the cost of mortgage rate buy-downs has become pricier, you believe that much of this is already accounted for in the second and third quarters?

I think, again, based on the fact that we are selling more than 50% of our homes intra-quarter, we'll see how that plays out as we look at the next in the third quarter and the fourth. But we move our rates along with the market. And so really it becomes a question of absorption and pace. We're going to continue to manage pace and margin to the returns that we want. And if we need to press a little more on the incentives to keep that pace consistent, we'll do so. But we move our rates along with the market. So it doesn't necessarily mean we're seeing significant cost. In the level of those buy-downs, it really just starts to stress the buyer when they climb up into the 7% and if they go to the 8% range, then we'll see a little more challenge in getting buyers qualified. And if it goes that high, I would expect to see our incentives increase to keep our pace.

Great. Thanks so much. Appreciate it.

Thanks, Mike.

Thank you. Your next question is coming from Eric Bosshard from CRC. Eric, your line is live. Please go ahead.

Good morning. Two things if I could. First of all, the gross margin in the quarter was a little bit better. What was different that created that?

I'm assuming you're talking on a sequential basis?

Correct.

Yeah, so a little bit of it was just core inclusive of just a very modest pickup on the incentive front in terms of the forward commitments and the interest rate buydown because you'll see when we put out our supplemental guidance, that kind of core margins up about 20 basis points. And then we also had a little bit less of an impact on warranty and litigation this quarter. Those are the two kind of biggest pieces of why there was a sequential increase.

Okay. And then secondly, you talked about it a little bit, but I'm just curious that the effectiveness of the incentives as you moved through the quarter and in the March and April, I suppose. But just trying to figure out the effectiveness in the last comment that was made of as rates moved higher, what do you have to do different with buydowns? I'm just curious how you're seeing a conversion or closing customers behave relative to incentives relative to buydowns and if you indeed are having to do anything different?

Currently, we are maintaining our approach. We are responding to the rates and the customers we have at the moment. They are responding very positively to the incentive offerings that our teams have created for the various neighborhoods we serve. Therefore, we are not seeing any issues with the current range of rates we are dealing with. We feel steady and optimistic about our situation.

Okay. Thank you.

Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead.

Awesome. Thanks so much guys for taking my question. You made a lot of progress here in getting back to your historic levels on cycle times. That said, I mean, one thing that I'm thinking here is you're also building a more value engineered house today than perhaps what might have been the case pre-pandemic. So the question really is, is there an opportunity to bring cycle times lower versus that historical trend? Or do you really think kind of four months is the steady-state we should be thinking about longer term?

Yes, Sam, we're pleased to be back at what we deem our historical norm, and you bring up a good point, we are building a more efficient house and it's been an extreme focus of us to try and pull labor and man hours out of the home to reach affordability and maintain affordability. We're always going to believe there's upside for improvement in our business. And so we continue to stay focused on our inventory turns and the opportunity to reduce cycle times and be more efficient in the construction process where we can. We're going to continue to strive for that. We're not counting on significant reductions from here. We got back to this place and we'll continue to focus on doing everything we can to drive it down further.

Got you. And then maybe to touch on order ASP a little bit. It looks like there was a little bit of a sequential lift between Q1 and Q2. I just would like to hear maybe a bit more context on that number. Was there a function of perhaps a little bit of a dial back in incentives in early spring? Or were there any kind of geographic or other mix dynamics that might have also driven that sequential improvement? Thanks.

Yeah, it continues to be primarily geographic when you look at our price points. The South Central and the Southeast, which are two of our lower price point markets in terms of average sales price have been a slightly lower percentage of our mix for a couple of quarters now and that continued this quarter.

Awesome. Thanks so much. I'll pass it on.

Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live. Please go ahead.

Hey guys, good morning. Nice quarter and thanks for taking my questions. First, on the resale market, I'm curious some of your thoughts there. We were starting to see inventories ticking up a little bit in some of your markets more meaningfully than others. And when I think about the spec entry-level model, I think you guys have really benefited from the tight resale market over the last few years. I'm just curious, are there any markets now where you're starting to see increased competition from resale, maybe more contingent buyers on your move-up product and just more broadly, how you're viewing kind of the uptick in resale inventory right now?

I believe there is still a very limited amount of inventory available in the marketplace, particularly at our affordable price point. Additionally, the interest rate incentives we can offer, which are not typically found with existing home listings, help us address the affordability issue better than existing home sales can. However, we have not observed a significant impact on our sales pace so far.

Great. Appreciate that. And then second, on the NAR settlement with brokers. I know it's still very early, but you guys have been one of the heavier users that were friends to the brokerage community, if you will, over the years. I think you view them as an important tool to bring buyers to your communities. And I'm just curious if you've given any thought to how this settlement might change the economics there, the relationships you have with brokers. And any commentary you can give would be helpful.

Yeah, Alan, I mean, we think this is going to take some time to play out. You know we work very closely with the brokerage community, and we'll continue to do so regardless of what direction this takes. I think you are going to see some restructuring, certainly in terms of commissions and it will have some impact, I believe, on the number of realtors that stay active through the market. But we are going to continue to stay close to the realtor community, communicate with them. This is still an emotional buy for people. And we're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers through whatever form it takes over the next couple of years.

Appreciate the thoughts. Thank you.

Thank you. Your next question is coming from Collin Verron from Jefferies. Colin, your line is live. Please go ahead.

Good morning. Thank you for taking my questions. I guess I just wanted to start on the lot in cost inflation you're seeing. Any thoughts on the magnitude of that through the remainder of the year? I think you said it was tracking in the low-single digits in the most recent quarter.

Yeah, I think our expectation is we'll continue to see moderate increases, I think that low single-digit percentage continuing is in our current, what we can see in our current pipeline.

That's helpful. And then just on the lots controlled, it's moved up again as you concentrate on that land-light model. I guess how much more runway do you think that there is? And any update on the time line of getting there and just thoughts on the right number of the years of land or lots owned?

So, I think we continue to look for ways to be more efficient and more capital-efficient in our lot portfolio. 77% is a very controlled number position right now and we're looking at 62% of our deliveries were on lots that were actually developed by third-parties or Forestar. So, we're continuing to expand those relationships and seek opportunities to buy more lots from third-parties. I'm not going to put a ceiling on to how far we can take that, but we've made a lot of progress. And when you've had a lot of success, incremental success takes a lot more work, but that's what we do every day.

Great. Thank you for taking my questions.

Thank you.

Thank you. Your next question is coming from Jade Rahmani from KBW. Jade, your line is live. Please go ahead.

Thank you. Are you seeing any changes in terms of investor appetite for single-family rentals and multi-family leaving aside the issue of interest rates? We've seen Blackstone, for example, make a couple of quite large acquisitions, wondering what the tone is from the investors you sell to?

Yeah, I would say we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market. They're still being cautious and rates are where they are and cap rates acting in kind. But I would say that just across the board, we've seen a bit of a tick up and have more interested parties in those assets that we have out for sale today.

And a follow-up would be, a lot of these investors are looking for scale in their capital deployment. You've already done some large deals. Are you seeing on average the size of deals you're looking at increase?

Size per community, not necessarily, but there are large appetites to place dollars at scale into this space.

Thank you.

There are multiple communities, yes.

Thank you. Your next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to follow up on Jade's inquiry regarding the rental side. Revenue is flat sequentially and expected to remain so in the third quarter, despite having more units completed in both single-family and multi-family sectors. If you were to explain why the situation isn't improving, would you say it's mainly due to investor hesitancy at this time, or is it related to the pricing discussions not aligning with your margin and return objectives for those projects?

You know, it's really a matter of communities, community size and timing of those closings and we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market. Not seeing the margins where we would like to see them, but that's relative, that's just tied to cap rates and interest rates. But no real significant shift that we're going to see in terms of up or down and it's going to be a little lumpy as we look through the quarters because we're selling whole communities at a time. It's not one at a time.

Got it. Okay. And then shifting gears back to the homebuilding margins. Last fall, when there was a period of significant rate volatility and ultimately rates came down, you had a negative mark-to-market. Jessica, I think you mentioned that lower forward contracts played a role in lower costs or mark-to-market there played a role in sequential gross margin improvement in fiscal quarter. Can you be more specific around what impact or quantification your forward hedges are having on both the 2Q gross margin? And is that actually a continued sequential benefit in your 3Q guide?

No, I mean, we really think about it, Mike, as last quarter was somewhat of an anomaly. We're not going to say one-time. I mean, it could happen again, but it was highly unusual in terms of the rate move going up and down so quickly and the timing in which that happened and then a move close to quarter end. And so this quarter when we say minimal impact, I mean, we've talked about outside of Q1, it's been no more than a plus or minus 10 basis point move from a gross margin perspective. And so, hopefully, that will be the case going forward as well, and you won't see a repeat of what happened in Q1.

Okay, great. Thanks.

Thank you. Your next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live. Please go ahead.

Thank you. Good morning, everyone. My first question is on the material costs. I think, Jessica, you had mentioned that you're seeing some success on seeing some of those move lower. Can you give more detail on what is coming down and how you're thinking about that relative to some of the other areas where there may be some inflation that's coming through? And any thoughts on lumber as well within that?

I'll start with lumber and then I'll leave that up and down on other categories to Paul and Mike, they're probably better or worse than I am. Lumber is still less than half what it was at its peak back in March of '22, but it has started to increase since December, which would be kind of a typical seasonal trend. So hopefully, we're not going to be talking about lumber in terms of big swings in our closings. And most of our year-over-year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to be relatively modest.

Very fair. And I think in terms of the other categories, it's a market-by-market category-by-category, I don't want to say struggle or battle, but it's an ongoing effort to be as efficient as we can do that. And we make some progress on some categories and then we might have to give back some on others. So it's a constant battle, Susan. And we've seen right now, I think some moderation in seeing increases, which has been very helpful in margin right now.

Okay. All right. That's helpful. And then you guided your SG&A to be about 7% for the third quarter, which is still really low in there even as you're making those investments. Can you just talk about the puts and takes into the SG&A as we think about not just the third quarter, but even looking out? Any thoughts there?

We are consistently working to position ourselves for growth across our footprint. As we've expanded and gained more scale in specific markets, this has required us to realign certain divisions and divide some markets into multiple divisions. This strategy aims to enhance our market share penetration in those areas. The same approach is applied to our infrastructure nationwide. We are currently making investments in these areas and anticipate a relatively quick return on them. This is one reason our SG&A percentage has remained low, despite these investments, which sometimes need to happen before we see growth. Our focus is primarily on our people, ensuring we have sufficient resources on our teams, and securing land personnel in various markets. This enables us to establish land positions and build relationships with third-party developers and trades, ultimately supporting our growth objectives.

Okay. That's great. Thank you. Good luck.

Thank you.

Thank you. Your next question is coming from Kenneth Zener from Seaport Research Partners. Kenneth, your line is live. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, Ken.

All right. Margin stability up 52% of closings intra-quarter orders. Why was it higher specifically? It looks to be, again, I could make my own narrative, but I want to hear it specifically. And then what was the margin spread between those 52% intra-q versus the ones that were naturally coming out of backlog?

I frankly don't think any of us looked at that before the call, but we can take a look and get back to you. It was 54% versus the 52%, just to clarify. And the driver on that was just a function of we went into the quarter with over 9,000 completed specs and our cycle times are back to normal.

Okay. So you're getting, yeah, we'll follow-up on the margin backlog versus intra-q, is that correct?

Yes.

Okay. And then Paul I think you kind of talked about your markets in Florida not being affected by the rise in inventory we're seeing in coastal markets and/or a higher cost of ownership related to insurance. Could we maybe isolate that comment to a place like Central Texas, I think Austin? I know you're building in Buda, not Austin per se. But we are seeing inventory go up in Central Texas, you don't have right the coastal issues. Is this still that you have homes that are affordable and in demand? So you're seeing the same dynamics you talked about there where we're kind of excluding coastal conditions? Thank you.

Well, the question and the comment back on Florida was mostly as it relates to insurance and increased costs around that. Inventories, we have certainly seen more inventory in the market today on the resale side than we have in the past. Months of supply has crept up slowly across most of our markets, but majority of what we see coming to the market is still maybe either overpriced or has significant need and work and very minimal in the affordable price points where we tend to compete. So we expect it's going to take significantly more homes to come on before we see a lot of impact on our ability to sell. But we've competed in that market forever. We have been a spec builder. We do that to compete in the new-home market as much as we do against the resale market. Feel very good about our product and positioning against the homes that come to market as resale available when they do. And we think we have a great package of incentives, warranty, and closing cost basis to compete against that inventory when it does come on and it will at some point in the future.

Right. Appreciate it. And I guess, Jessica, you said 3% on land. Could you split that between land you developed and land you're buying finished?

I don't think we've quantified that, and I definitely don't have that in front of me.

Talk to you guys later. Thank you.

Thank you. Your final question this morning is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live. Please go ahead.

Hi, good morning. Thank you for taking my questions. First, regarding the fiscal third quarter gross margin outlook for flat to slightly up, how do we view the assumptions for the stick and brick per square foot, net pricing, and land inflation that are included in that guidance? Specifically concerning land inflation, given that lot costs are flat quarter-over-quarter, what trends are you observing in land inflation for land that is currently under contract?

Yeah, Rafe, in our forward guide, we've got relative stability right now in materials and labor. So but we are still seeing some components go up slightly. So I think a very low single-digit percentage increase is generally the expectation there and our lot costs are a little bit higher than that, still low single-digits, but probably more in that 3% to 4% range. And in terms of just new land, that's deal by deal specific, market by market specific. I think in general, we've seen land prices kind of settle out here over the last little while, not as much inflation, but the long-term trend is still up over time. This industry still has a shortage of lot availability. And so I think that's going to continue to be a constrained situation. And so in that situation, we would not expect to see land prices come down.

Thank you. That's very helpful. And then on the further rate buydowns, the forward commitments that you all have, how long do those go out? Are those months, are those weeks? So the recent move in rates, it hasn't impacted the rates that you are offering yet. When will that start to be kind of offered to the homebuyer? Like how long of forward commitment do you have?

We generally don't go out too terribly far in terms of the volume of forward commitments that we go with. We have various levels based upon anticipated demand of how much we'll buy for a given expiration date, which can vary from 60 days to 90 days out. But we're not going to look to fulfill all of our existing sales expectations with any one given hedge or any one given build or forward and we'll continually sort of reprice to market so that we're offering incentives that are within as Paul said before, I think a point to a point and a half of market when that is the incentive that we feel is the most effective at driving appropriate pace and margin for the returns at a given community.

Thank you. That's helpful.

Thank you. Your next question is coming from Alex Barron from Housing Research Center. Alex, your line is live. Please go ahead.

Yeah, thanks guys and great job in the quarter. Yeah, I was just curious around land development costs. I mean, you guys are developing, I mean using a lot more land options and stuff, but are land development costs expected to impact margin for you guys in the near term or do you feel that's going to be more absorbed by whoever is developing the land for you?

Hey Alex, we haven't seen much decrease in land development costs related to materials or labor. There's still a strong demand for labor, particularly from those actively developing land, and infrastructure improvements across the country are sustaining that demand for materials and labor. This is reflected in the increase in lot prices over time. While we would appreciate a reduction, we don't anticipate it happening in the near term.

Got it. And I guess you already touched a bit on the rental business, but I was just curious if the margins we saw this quarter, do you expect that's going to be sort of more what they're going to look like in the future or not necessarily?

It's going to be largely rate dependent in the capital markets as to the execution on those. I think at this point, our expectation is that it's going to be somewhat consistent with where we are today, but there is opportunity for some volatility around that too, especially within quarters within one quarter to the next because these are some chunky transactions. There are large individual transactions. And our multi-family platform is not yet to the scale where they're producing a significant number of multi-family communities delivering every quarter to the marketplace. So there's a relatively small number, they can be chunky and there's opportunity for volatility. Our expectation is somewhere in the range we're in today.

Got it. Okay. Well, good luck. Thanks.

Thank you.

Thank you.

Thank you. The final question this morning is coming from Jay McCanless from Wedbush. Jay, your line is live. Please go ahead.

Thanks. Good morning, everyone. So on that rental guidance you talked about for 3Q, is that guidance based on projects that already have financing in place? Or is that just the schedule of what you think might close during the quarter?

It's a mix of both.

Okay. And then the other question I had is, I don't want to make too much of this if it's not a big deal, but it does seem like you're going from maybe an aggressive selling pace during the COVID years now to trying to gain market share leadership through more communities. I guess, how far along do you think you are in that transition? And I think kind of to Su's question also, what is that ultimately going to mean for SG&A going forward if you are starting to staff up and bring more people on to support a larger organization?

Yeah. I wouldn't say, Jay, that it has anything to do with us trying to push more pace during COVID, it's all tied to our lot position. And so we've been building our lot position up, but not all of those lots were ready to go. And so we knew the communities were coming. And obviously, the market was extremely hot for a period of time. So we were able to drive additional absorption where we had the lots available. We don't have that same kind of strong demand, less affordability challenged environment today. And at the same time, our lots are getting finished and the communities are ready to go. So we're bringing them online and it happens to be good timing that we have the communities ready to go when we're not able to drive incremental absorption further in our existing communities.

Okay. Great. Thanks for fitting me in.

Sure. Thanks.

Thank you. I would now like to turn the floor back to Paul Romanowski for closing remarks.

Thank you, Tom. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third quarter results in July. Congratulations to the entire D.R. Horton family on producing a solid second quarter. We are proud to represent you on this call and appreciate all that you do.

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.