Good morning and welcome to the First Quarter 2025 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 form of 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, Paul, and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2025. 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 in the next few days. After this call, we will post updated investor and supplementary data presentations to our investor relations site on the presentation section under news and events for your reference. Please note that we have added and updated several slides in our investor presentation to highlight our returns focused strategy and performance. 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 first quarter, The D.R. Horton team delivered solid results, highlighted by earnings of $2.61 per diluted share. Our consolidated pre-tax income was $1.1 billion on $7.6 billion of revenues, with a pre-tax profit margin of 14.6%. We remained focused on enhancing capital efficiency to produce sustainable returns and cash flow. Our home building pre-tax return on inventory for the trailing 12 months ended December 31st was 26.7%. Our return on equity was 19.1% and return on assets was 13.4%. Our return on assets ranks in the top 15% of all S&P 500 companies for the past three, five, and 10-year periods. During the three months ended December 31st, we generated consolidated operating cash flow of $647 million and returned $1.2 billion to shareholders through share repurchases and dividends. Overall, the demographics supporting housing demand remain favorable. Although both new and existing home inventories have increased from historically low levels, the supply of homes at affordable price points is generally still limited. To help spur demand and address affordability, we are continuing to use incentives such as mortgage rate buy downs, and we have continued to start and sell more of our smaller floor plans. Our local teams have been successful meeting the market, with net sales orders this quarter decreasing only slightly from the prior year. We typically experience our seasonally slowest sales demand in the first quarter, and our tenured local operators seek to find the right balance of sales pace, pricing, incentives, and inventory levels to position each community for optimal returns as we enter the spring. With 53% of our first quarter closings also sold in the same quarter, our sales, incentive levels, and gross margin are generally representative of current market conditions. With our focus on affordable product offerings, homes and inventory, continued improvement in our construction cycle times, and finished lots available in our pipeline, we are well positioned for the remainder of fiscal 2025.

Earnings for the first quarter of fiscal 2025 decreased 7% to $2.61 per diluted share compared to $2.82 per share in the prior year quarter. The income for the quarter was $845 million on consolidated revenues of $7.6 billion. Our first quarter home sales revenues were $7.1 billion on 19,059 homes closed compared to $7.3 billion on 19,340 homes closed in the prior year quarter. Our average closing price for the quarter was $374,900, down 1% sequentially and roughly flat with the prior year quarter.

Our net sales orders for the first quarter decreased 1% from the prior year to 17,837 homes and order value decreased 2% to $6.7 billion. Our cancellation rate for the quarter was 18%, down from 21% sequentially and from 19% in the prior year quarter. Our average number of active selling communities was up 2% sequentially and up 10% year-over-year. The average price of net sales orders in the first quarter was $373,000, which was down 1%, both sequentially and from the prior year quarter.

Our gross profit margin on home sales revenue in the first quarter was 22.7%, down 90 basis points sequentially from the September quarter as expected due to higher incentive costs. On a per square foot basis, home sales revenues and stick and brick costs were both relatively flat sequentially, while lot costs increased approximately 3%. Our incentive costs are expected to increase further on homes closed over the next few months, so we expect our home sales gross margin to be lower in the second quarter compared to the first quarter.

In the first quarter, our homebuilding SG&A expenses increased by 6% from last year and homebuilding SG&A expense as a percentage of revenues was 8.9%, up 60 basis points from the same quarter in the prior year and in-line with our expectations. Our increased SG&A costs are primarily due to the expansion of our operating platform. Our employee count is up 8% from a year ago. Our community count is up 10% and our market count has increased 7% to 126 markets and 36 states. The investments we have made in our team and platform position us to execute and sustain our strategic plans to produce strong returns, cash flow and market share gains.

We started 17,900 homes in the December quarter and ended the quarter with 36,200 homes in inventory, down 15% from a year ago and approximately 1,200 homes lower than at the end of September. 25,700 of our homes at December 31 were unsold, relatively flat with year-end. 10,400 of our unsold homes at quarter end were completed, of which 1,300 have been completed for greater than six months. For homes we closed in the first quarter, our construction cycle times improved a few days from the fourth quarter and approximately three weeks from a year ago. Our improved cycle times position us to turn our housing inventory faster in 2025, and we will continue to manage our homes and inventory and start pace based on market conditions and to achieve targeted closings by community.

Our homebuilding lot position at December 31 consisted of approximately 640,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns, and operational flexibility.

In the first quarter, our rental operations generated $12 million of pretax income on $218 million of revenues from the sale of 311 single-family rental homes and 504 multi-family rental units. This quarter's rental pretax profit margin was impacted by recent uncertainty in the capital markets and higher interest rates for purchasers of rental communities. Our rental operations provide synergies to our homebuilding operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and lot pipeline.

Forestar, our majority-owned residential lot development company reported revenues of $250 million for the first quarter on 2,333 lots sold with pretax income of $22 million. Forestar's owned and controlled lot position at December 31 was 106,000 lots. 64% of Forestar's owned lots are under contract with a right of first offer to D.R. Horton. $220 million of our finished lots purchased in the first quarter were from Forestar. Forestar had approximately $640 million of liquidity at quarter end with a net debt-to-capital ratio of 29.5%. Our strategic relationship with Forestar is a vital component of our returns-focused business model.

Financial Services earned $49 million of pretax income in the first quarter on $182 million of revenues, resulting in a pretax profit margin of 26.7%. During the first quarter, our mortgage company handled the financing for 79% of our homebuyers. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 724 and an average loan-to-value ratio of 89%. First time homebuyers represented 60% of the closings handled by our mortgage company this quarter.

Our capital allocation strategy is disciplined and balanced to sustain an operating platform that produces compelling returns and substantial operating cash flows while positioning for growth. We have a strong balance sheet with low leverage and strong liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During the first three months of the year, consolidated cash provided by operations was $647 million. We repurchased 6.8 million shares of common stock during the quarter for $1.1 billion, which reduced our outstanding share count by 4% from the prior year. As our stock price declined during the quarter, we accelerated some of our planned share repurchases for the year. Our remaining share repurchase authorization at December 31 was $2.5 billion.

Looking forward to the second quarter, we currently expect to generate consolidated revenues of $7.7 billion to $8.2 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 for the second quarter to be approximately 21.5% to 22% and our consolidated pretax profit margin to be in the range of 13.7% to 14.2%. We have added guidance for consolidated pretax profit margin to provide more meaningful insight to our overall profit expectations.

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and focus on affordable product offerings. All of these are key components of our operating platform that sustain our ability to produce strong returns, grow the business, and generate substantial cash flows while continuing to aggregate market share. We have significant financial and operational flexibility, and we plan to maintain our disciplined approach to capital allocation by providing compelling returns to our shareholders to enhance the long-term value of our company. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. This concludes our prepared remarks. We will now host questions.

Thank you. At this time, we will be conducting a question-and-answer session. And the first question today is coming from John Lovallo from UBS. John, your line is live.

Good morning guys. Thanks for taking my question. Maybe starting off with just the gross margin outlook in the second quarter. So it looks like sequentially going from 22.7% to 21.5% to 22%. Can you just help us with some of the moving pieces there? I mean, is that really the expectation of just higher incentive levels? Or is there something that changes sequentially in terms of land, labor and materials?

Hi, John, really, it is just a matter of incentive levels and what we are seeing in the market today. We've closed 53% of the homes we closed this quarter were sold in the quarter. So we think it is representative of kind of where we are, and looking throughout the quarter, our margin on closings in December was a little lower than the prior two months. So based on the visibility we have today, what we are seeing in the market, we do expect a slight step down in margin on closings in our second quarter.

Understood. And then in terms of deliveries, it looks like you guys beat by about 1,000 units versus the top end, still kind of maintain that 90,000 to 92,000 guide for the full year. How would you kind of characterize that? Was there anything pulled forward into the first quarter that you didn't expect? Or is this more just a little bit of conservatism, just not knowing what lies ahead as we move into the spring?

I think we are always a little concerned in the fourth calendar quarter, our first fiscal with the sales demand environment. We had the inventory, and the teams did a great job of delivering that inventory to closings and putting people on homes. So feel really good about the execution across the board. And we're positioned to continue to deliver homes, and we need to sell a fair number of homes this quarter that we are going to close this quarter, but we've got the inventory position to do so.

I think the beat really just reflects our continued improvement in build times and also the fact that we did sell and close 53% of our homes intra-quarter, that's a little bit higher than it typically would be for a December quarter.

Thank you. The next question is coming from Alan Ratner from Zelman & Associates. Alan, your line is live.

Hi guys. Good morning. Thanks for the details so far. First question on the start pace. That's been trending lower here, which I think makes sense given the environment. But three quarters in a row, down year-over-year. Just curious how you are thinking about the start pace going forward. Are you thinking about just given the improving cycle times, bringing back some components of BTO back in the business? Or do you feel like just given that improving cycle time, you can more appropriately match the start of sales going forward and still hit that full year guide?

Yeah, Alan, I believe that just the improved cycle times that we have seen have allowed us to carry a lower number of inventory, and that's why you've seen that sequential decline in our start pace. It does allow us to sell earlier in the process because of our ability to turn these homes faster. So it does allow us to pick up a little broader scale on the buyer demographic or demand that's out there. I’d expect on a go-forward basis that you are going to see our starts to be more in line with our sales pace. We just replenish the inventory that we have and start to build as we grow throughout the year.

Okay. Great. Second question, we are day one here on the new administration, a lot of uncertainty about which direction some of the housing-related policies might go in, whether we're talking about tariffs or integration or the future of the GSEs. I'm just curious how you guys are thinking about the next several years in the backdrop and whether you are changing any strategies or doing anything in anticipation of that?

Alongside everyone else, we are keeping an eye on what will occur. But we've been through a number of changes in administrations before, and ultimately, we are just focused on what buyers can afford. We are going to continue to open communities and try to price our product as affordably as possible to meet the needs of home buyers. There is a core need for shelter and for homes in our country, and we are going to continue to do the best we can to supply it at an affordable price as we can.

Thank you. The next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.

Thank you very much, everyone. I appreciate the insight. I was really pleased to see the share repurchases completed this quarter, especially given the challenging environment, and the cash flow was impressive. I understand you are continuing to project cash flow above 2024. Could you share your thoughts on cash flow from operations in relation to your combined share repurchases and dividends? That information might help clarify things further.

Sure. As we said in our scripted remarks, we've essentially distributed all of our cash flow from operations over the last 12 months to shareholders through repurchases and dividends. And so that would continue to be our general expectation as the substantial majority of our cash flow will go to repurchases and dividends. So our guide of the $2.6 billion to $2.8 billion of repurchases and the $500 million of dividends is a good proxy for generally the range of where we would expect our cash flow from operations to be for the year.

Yes. That's impressive. Appreciate that. And then second question relates to your leverage longer-term. I think you had indicated that your long-term leverage goal is around 20%. Can you give us a sense for like what kind of cash balance you guys would typically carry? So in other words, like what kind of net debt to cap do you think is a good target longer term for the company?

Sure. You are correct on the consolidated leverage target at or below 20%. Net, it is probably closer to approximately 10%. Cash is going to vary though quarter-to-quarter. We typically have our heaviest cash balance or our highest cash balance at the end of the fiscal year, call it roughly $3 billion. And then the other quarter is probably anywhere from $1 billion to $2 billion.

Gotcha. That's really encouraging. Okay, thanks a lot guys. Appreciate it.

Thank you. The next question is coming from Carl Reichardt from BTIG. Carl, your line is live.

Thanks everybody. I want to discuss SG&A for a moment. Mike, you mentioned the growth rate in store count and lots, as well as the number of people you've added. As we start to anniversary those growth rates, you've pointed out the importance of balancing pace with margins and returns moving ahead. Since you won't be providing guidance on this anymore, where do you believe your target SG&A should be? When do you expect to see better leverage on those SG&A dollars? Will it be later this year, considering the seasonal trends, or are we looking at a timeline of the next couple of years?

As we commented, we have made investments. We've expanded our market count, increased our community counts. As you know as well, Carl, we are always focused on being as efficient as we can. So we would expect to see leverage overall in our SG&A. I think today, as we look at fiscal '25, we would expect our homebuilding SG&A percentage is probably a little higher than it was in '24, but we certainly expect to leverage those investments as we move beyond '25 into '26 in future years. We will be very focused on maintaining as efficient of an infrastructure as we can to support our growth.

Thank you, Bill. Regarding the 65% of your total lots with finished lot option contracts from developers, can you discuss the self-developed lots and the differences between farmer auctions and land banking transactions? Additionally, could you share your views on land bank transactions compared to self-development?

I think the 65% we discussed in the quarter relates to lots developed by either a third-party or Forestar. These are finished lots created by professional entities, which could involve deals they source or projects we assign to them under buyback contracts. Regarding self-developed lots, the homes we closed on those were financed through our balance sheet. We are constantly looking for more efficient ways to utilize capital, including considering land banking development services. We are focused on optimizing our capital usage in our lot pipeline.

We'll use land or lot bankers if we have an excess supply of finished lots that we are not ready for. But in terms of true traditional land development where you don't technically have a lot of risk transfer, we have little to no of that. We are 100% focused on risk transfer in the structures of our contracts.

Thanks guys. Thanks everyone.

The next question is coming from Michael Rehaut from JPMorgan. Michael, your line is live.

Thank you. Good morning everyone. Congratulations on the results. My first question is about your comment regarding inventory levels. You mentioned that supply is still generally limited at affordable price points. I would like to explore that further and see if there are any regional differences you've observed in inventory levels. Additionally, could you highlight which markets or regions you operate in may be performing better or worse than the corporate average?

We have observed some buildup in the Florida market, with certain areas experiencing more than others. Similarly, this trend is evident in some Texas markets. However, overall, we believe inventory is in good shape across our footprint. We think we, along with other builders, are being responsible in monitoring the market and adjusting our inventory accordingly. The resale market is expected to continue evolving as people start to loosen up and put their homes on the market.

Okay. Appreciate that. I guess secondly, your option lot percentage of 76%. I think you kind of maybe reached over the last year or two, a high of 80%. I think in the past, you've talked about most likely not going below a year's worth of owned supply. Maybe you kind of stay in that 1 year, 1.5 years range. So as we look forward, I know you are talking still about improving inventory turns or build cycle times. I'm just wondering how you guys think about further improvement on capital efficiency, what are those levers that you look to move. And if there is any rethinking of where that option lot percentage or years owned supply might be able to go over the next three years to five years?

Well, Mike, our average is 76% across our operations. We do have markets that it is higher than that. And we obviously, have markets that it's lower than that as well. So we are still focused on continuing to ensure that we have a good network of third-party developers and we are utilizing Forestar as much as we can. So there still is opportunity for some of those markets that are at a lower option percentage to increase that. As Jessica did state earlier, we are very focused on risk transfer. And so if we are going to pay or to use a third-party to whether it is banking or developing lots, we are balancing what we are paying versus what the risk transfer and the capital efficiency benefits are. And so that's something we do continue to evaluate, as Mike said earlier, and we expect there will be opportunities for us to find ways to get more efficient with our lot pipeline going forward.

Great. Thanks guys. Good luck.

Thank you. The next question will be from Matthew Bouley from Barclays. Matthew, your line is live.

Morning everyone. Thank you for taking the question. So the closings guidance, I think, for the second half implies something like 52,000 homes closed or maybe 30% or so higher than the first half. I think is a little bit greater than normal or at least history. So I just want to get some color around your confidence in that step-up in closings. And it sounds like better cycle times, as you keep alluding to for sure, as part of that, but just any other assumptions we should consider that you are making in that kind of step up there?

No. I think we feel good about our efficiency today. We feel very good about our position of housing inventory, as well as the lot inventory that we need to achieve those numbers. Of course, we're very early in the spring selling season, and we need the spring to show up for us and to see the sales. But we believe that our operators are positioned to take advantage of the spring selling season and be in position to deliver on our guide of 90,000 to 92,000 homes for the year.

Okay. Got it. Thank you for that. And then secondly, back on the gross margin. It sounded like the margin exited December a little lower than the prior two months, if I heard you correctly. So is that second quarter margin guide assuming that the margin on homes, I guess, sold and closed during Q2 would be similar to December or lower than December? And I guess, conceptually, at what point would you look to kind of more hold the line on the gross margin? Thank you.

We continue to monitor traffic and demand in the neighborhoods, which affects our pricing and margin as we aim to maximize returns at the community level. We started the quarter with a mortgage rate around 6% and ended it at about 7%, which is how we moved into the second quarter. This influences our margin outlook, suggesting it may be slightly lower than what we saw in December as we navigate through the second quarter. However, it is springtime, which typically sees better sales, and we remain optimistic about the trends ahead.

All right. Thanks guys. Good luck.

Thank you.

Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live.

Awesome. Thanks so much. So maybe just a follow-up on the prior question here. Could you guys give us a sense as to what gross margin is embedded in your backlog on houses that you plan to close in the second quarter? Kind of just curious for a rough number there. And then maybe one other number on that point would be any sense as to what the bought-down rate is in your backlog. I believe you provided that in past quarters. So just curious if we've got an updated number there.

Sure. With regard to the margin and backlog, that is one of the key items that we do have visibility to when we are preparing our guide. So our margin in backlog is relatively consistent with the range that we are providing here for Q2. And then in terms of prevailing rate that we're offering in the market today, generally between $4.99 to $5.99 range depending on the product is what's prevailing out there really for the last little while across our sales offices.

And there is really no meaningful change in that average rate this quarter versus last quarter.

No, that helps. I have a higher-level question regarding labor costs and material costs. It seems these are expected to stabilize in Q2, but please correct me if I'm mistaken. Could you elaborate on your strategy for managing increased costs in these two areas due to external factors, such as the government's stance on remigration or rising material expenses from rebuilding after natural disasters? I'm interested in understanding how you navigate potential inflation in labor and materials. Thank you.

I believe that currently, we have good access to the labor and materials we need, which has allowed us to continue improving our cycle time. As a result, we have been able to keep pricing stable for both materials and labor. It remains to be seen how the current administration will affect this, particularly concerning tariffs and labor availability. Nonetheless, we feel confident about our market positioning, our market share, and our ability to maintain both labor and necessary components. We do not anticipate significant inflation in either of these areas over the next 12 months.

That’s helpful. Thank you so much. I will pass it on.

Thank you. The next question will be from Eric Bosshard from Cleveland Research. Eric, your line is live.

Good morning thanks. Two things, if I could. First of all, in terms of affordability, I'm curious as you think looking forward, I think your ASP indicated it is down 1%. Is there something more meaningful that you are considering or taking steps towards to address affordability? I know you talked about smaller homes, but is there a need to unlock or an opportunity to unlock demand by doing something more meaningful in changing the product and changing your ASP?

It's difficult to expect a substantial change in the near term based on our current actions. The adjustments we're making are more gradual, varying from one neighborhood to another. While we're not completely restricted, the lots that are already under development and have received municipal approval often come with specific product parameters and guidelines that limit our ability to make significant changes quickly. Over the long term, we are continuously looking for ways to optimize the use of land and development funds in relation to the costs associated with delivering a certain number of bedrooms, bathrooms, and square footage for homeowners.

For data points this quarter on homes we closed, our average square footage was down 1% from a year ago, which has been down a low single-digit percentage share for the last couple of years. Sequentially, it was relatively flat. And we did see another tick up in the number of attached homes, so call it townhomes and duplexes that we closed that was roughly 17% of our business, which was up from 15% sequentially.

Okay. And then secondly, I know as you look forward to the spring selling season, rates were 7, rates were 6, rates are 7. Is your customer behaving differently with rates back at 7? Curious, especially in an environment where it feels like we are a little bit higher for longer. Is the consumer responding to incentives the same way? Is traffic the same? Or is it different this time back at 7?

We believe that our best incentive and most significant impact on consumers is the use of some form of rate buy down, which has increased for us throughout the quarter to help maintain rates at a comfortable level for them to proceed with their monthly payments. We successfully achieved our goals in the quarter, with 53% of the homes closed and sold in that time. We managed to navigate through this past quarter, and although it's early in the current quarter, I've been pleased with the traffic levels and sales pace we are experiencing in our models. We will see how this trend continues, as there is still a long way to go in the spring selling season.

Thank you.

Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live.

Good morning. Can you provide an update on consumer debt levels and whether there have been any significant changes in availability or qualification? Additionally, when comparing first-time buyers to move-up buyers, is one group performing better than the other?

I would say that today, we have seen the levels of traffic in our offices improve, making it easier for move-up buyers to proceed. Over the last quarter, we have noticed a stronger tendency to reach sales and make final decisions. However, there hasn't been a notable change in the debt levels or credit profiles of our buyers. In fact, about 59% of our buyers through our mortgage company last quarter were first-time homebuyers. We recognize that if we could lower the credit score requirements significantly, it would greatly expand our pool of potential buyers. Nevertheless, we invest considerable effort in our sales offices to help buyers navigate their credit challenges and position themselves to purchase their first home.

Okay. That's helpful. And then just following up on smaller format homes or products like town homes or duplexes, understanding it varies by community. Is it possible to talk about sort of how the returns or the gross margin profile of smaller-format homes compares with a more traditional offering, if at all?

It is very similar, actually. If we look at our product and project performances, the margin is going to be very similar. If you are well-positioned with the right product, the right price, the right house, whether it is attached or detached, you’re going to get similar outcomes in your margin and your returns.

Okay. That's helpful.

The next question will be from Mike Dahl from RBC Capital Markets. Mike, your line is live.

Thanks for taking my questions. I wanted to inquire about the pretax margin guidance. I appreciate that you want to frame your business this way going forward. However, I noticed that you are guiding pretax margins at the midpoint down 280 basis points year-on-year, while gross margins are only guided down 150 basis points. It seems like there might be something else going on, whether it's related to rentals, SG&A, or Forestar this quarter, particularly in terms of the second quarter. Could you help us understand that?

Sure. Rental margins have decreased due to uncertainty in the capital markets and rising interest rates, which have made it more difficult for buyers of rental properties over the past year. As a result, margins in that area have been lower. We plan to continue operating in this segment and anticipate improvements by 2025, although we are currently facing some supply challenges that should ease in the latter part of 2025 and into 2026. Overall, the primary factor contributing to the year-over-year change in gross margin, beyond what we see in homebuilding, is tied to the rental segment.

Okay. Got it. So year-on-year rental revenue and margin down significantly, biggest driver.

Yes.

Got it. And going back to the discussion about price versus pace, as you consider this, you've added some slides focusing on returns and adjusted your guidance. You've been return-focused for a while now, but in the current environment, does this focus lead you to prioritize price and margins over volume in the short term? How are your views changing in this regard?

Well, we continue to evaluate the business at a community level. Community by community, our local operators are making decisions based upon the lot supply they have in a given project or a given submarket relative to demand that they are currently seeing in that market and looking to price and start homes, price those homes and sell those homes at a pace that's going to maximize the margin available at that pace and for what that submarket can absorb. And it is very much, again, I know it's repetitive about saying this, but it is very much a community-by-community buildup of what's happening. And we see the best outcomes there, and we don't, at the corporate level, dictate a pace or a margin to the field. We ask them to maximize the returns. And there are times when you lean more heavily into pace to get pace up, and then once pace is up, you can oftentimes bring margin behind the sales momentum to help drive the returns up. But it is a balance that – it is probably a lot more art for us than it is science.

Gotcha. Okay, thank you.

Thank you. The next question will be from Ken Zener from Seaport Research Partners. Ken, your line is live.

Hello everybody. Could you provide insights on the margin spread between the 47% backlog closings and the 53% spec? Additionally, since you are operating in 126 markets while most builders focus on approximately 50 markets for their closings, could you discuss the margin spread observed between those top 50 markets and your remaining 76 markets?

Your first question was about the backlog and our spec closings. Unfortunately, I don’t have that breakdown available. I can say that the 47% sold before the quarter is a bit different; in a lower interest rate environment, we tend to see higher margins than what we recorded at the end of December. However, I can’t provide you with specific numbers at the moment.

Okay. I think in the past, you mentioned a couple of hundred basis points from several years ago. So I wasn't sure if that might be a factor.

That would have been build-to-order versus spec.

Okay. Regional margins, you guys stand out versus many of the peers in having very similar regional margins across your business. Is there any reason we didn't necessarily see more dispersion of margins in your business because Florida, Texas, the West, they are all pretty similar in that 16% range LTM. Just curious as to why perhaps we didn't see more of a spike in some markets versus others. Thank you very much.

I think not exactly sure, Ken. I think there is just an aggregation of enough markets in each one of our regional groupings that it kind of blends out any specific market differences where the market is performing differently or our execution is different.

All of our markets are focused on maximizing returns community by community. And so it's a balance between margin and pace and inventory turns. And so yes, the better the margin, the better returns generally as well. And so that is focused across the board.

Thank you.

Thank you. The next question will be from Rafe Jadrosich from Bank of America. Rafe, your line is live.

Good morning. Thank you for taking my questions. First, regarding the land inflation you mentioned, which is up 3% quarter-over-quarter, could you clarify what that indicates for the year-over-year trend? Additionally, how should we view this for the remainder of the year? Are you experiencing any relief with your current contracts that may have an impact later?

On a year-over-year basis, we were up 10%, which we've been up a high single to low double-digit year-over-year for the last at least four quarters to six quarters. And on a sequential, it has continued to be just a low to mid-single-digit increase. I think our base case is going forward, it will remain a low-to-mid single for the foreseeable future. We are not necessarily seeing land prices come down, certainly not development costs when you look at an all-in lot cost. But we do think, on a year-over-year basis here at some point over the next couple of quarters, that should moderate to a mid to maybe just high-single digit.

That's helpful. Regarding the change in the share repurchase outlook, particularly the pace, have you maintained that buyback pace so far this quarter? How should we anticipate the pace as we move through the year? Was the increase in buybacks this quarter influenced by the stock price, or is there a shift in strategy concerning the pace of capital return relative to free cash flow?

Yes, there is no overall change in strategy. We will manage our share repurchases in line with our liquidity and balance sheet targets, but we do have the flexibility to accelerate repurchases when the share price experiences pressure. We observed this during the recent quarter, which continued until the end of the period. Therefore, we are taking a more aggressive approach to our repurchases. Based on the stock price at the start of this quarter, we remain active in the market. I would consider some of the increase in the first quarter as an acceleration reflected in our guidance of $2.6 billion to $2.8 billion. We did raise that guidance, although not by the full amount that would have been expected from the acceleration in Q1. We will continue to manage according to our overall plan, taking into account our liquidity, balance sheet, and cash flow capacities. However, our activity will fluctuate depending on stock valuation and opportunities to capitalize on price dips.

Thank you. Appreciate it.

Thank you. The next question will be from Trevor Allinson from Wolfe Research. Trevor, your line is live.

Hi, good morning. Thank you for taking my questions. First, can you just talk about any different demand trends geographically? Southeast and South Central were two weaker regions for you guys on a year-over-year basis. So perhaps any demand commentary in Texas and Florida would be helpful.

Yes. I think that as we talked earlier, some of the buildup we've seen in inventory has had some impact on sales when you look at portions of the Florida market and as well isolated to some of the Texas markets where they saw a significant run-up in valuations. We've seen some moderation there. But generally, as we enter into the spring, we've been pleased with what we've seen in these first few weeks in our sales offices across our footprint.

Okay. Thank you. That's helpful. And then second question, understanding it is early and a lot of unknowns with the new administration. Can you just give us some color on some potential impacts that you think could be possible if we were to see a major change in immigration or then also tariffs on China and Mexico? Just what kind of impact do you guys think that could potentially have on you all? Thanks.

Hard to foresee what the impact would be, and we're not sure what the change is going to be yet. So we continue to, as Bill said before, prepared to provide an affordable product for our buyers that we can get a homeowner into and qualify for the mortgage. And so we do everything we can to bring that affordability into play. If there are cost increases, that is not going to be helpful for housing affordability. I do think housing affordability is a stated goal of the administration. So we are hopeful that they're able to do some things that will help drive affordability.

And we have had to deal with both immigration changes and tariffs in the past. So it is something that we are familiar with. Likely, although it is way too early to say the ultimate outcome, likely it is more regional in nature than something sweeping across our entire footprint, but it remains to be seen.

Thank you. The next question will be from Buck Horne from Raymond James. Buck, your line is live.

Hi, thanks good morning. Just one quick one for me. I was wondering if you've seen any inbound or uptick in inbound interest from single-family rental investors in some of the longer-dated finished unsold inventory? Or would you consider maybe negotiating or doing a bulk deal if an SFR investor wanted to come in and take some of that inventory off your hands?

We have maintained our single-family rental business as primarily a merchant build. There are many opportunities for buyers to invest, and as we mentioned earlier, we've begun to engage in some forward sales before final stabilization. We have a lot to offer these buyers. We haven't been focused on selling our inventory in bulk at all. We are quite comfortable with our current inventory levels. We have kept the number of completed inventory units steady, which is where we want to be as we head into the spring selling season. Overall, we are optimistic about our inventory regarding both sales and build-for-rent.

Okay. Thanks. That’s all from me. Thanks. Appreciate it.

The next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live.

Okay. Good morning everyone. My first question is on the consumer and the rate environment. If the Fed does cut less than expected or fewer times than expected this year than, say, last year. But rates realize some level of stability as a result of that. Do you think that, that could be enough to ease some of the uncertainty or some of the fears that are leaving people on the sidelines? Or do you think that we actually need to see rates come down to see more of a lift in confidence and activity?

I believe we would greatly appreciate stability. If we could choose something today, managing our business and driving affordability would be much easier if we knew what the rate would be. I think stable rates for a prolonged period could encourage consumers who are hesitant to purchase a home. They would likely adjust their expectations regarding what they can afford, especially if they anticipated lower rates that do not materialize. We don’t have a base case scenario, and nothing in our guidance assumes rate declines as we progress through the year. While that would be beneficial, we would consider rate stability to be quite positive as we move forward.

Okay. That's helpful. And then just one last question on the rental side of things. You did mention efforts to realize greater efficiencies and some operational execution there. As you think about eventually improving that margin, how much of that can come from your own efforts versus a shift in the overall market?

I think what we are looking at there Susan, is the ability to sell some of the projects prior to stabilization from a greater capital efficiency perspective from us. So in terms of – we are always looking to control our stick and brick cost and operate efficiently. That's just part of the DNA in the homebuilding for sale platform, as well as across the rental platform. But to see materially different changes in the financial performance and selling those assets, it takes a fundamental increase in rents, net operating income and decrease in cap rates to thoroughly change the valuation on those, everything we can control the cost side. But the efficiency side we're focusing on now is working with some of the buyers of the build-to-rent communities to sell them earlier in the process, prior stabilization.

Okay. That’s helpful. Thank you. Good luck with everything.

Thank you.

The next question will be from Alex Barron from Housing Research Center. Alex, your line is live.

Thanks everybody. Good start to the year. I wanted to ask some of your competitors seem to have a philosophy of trying to sell a certain number of homes and do whatever it takes to get there, even if it means offering super low interest rates. Wondering if you guys have maintained the same approach to the business that you have historically or whether you guys have maybe approached it a little differently in terms of your willingness to balance margin versus pace. If you can comment on that.

I think as we have alluded to earlier, it is always a community-by-community buildup. And we are looking for a consistent pace in those communities that allows us to drive margin and a return community-by-community. So we aren't making that decision from here. We do rely on our local operators to balance what they need to. They need to be competitive in the market. So sometimes we may offer a rate or an incentive beyond where we would hope to. But at the end of the day, we're going to be competitive in the market to achieve the absorptions we need. And when we get on pace, it allows us to drive margin and therefore, returns at a higher level. But it's a community-by-community, market-by-market daily activity for our operators.

Got it. And then wondering if you can comment on Forestar. It seems like there are a number of lots sold, I suppose, mostly to you was lower than expected generally, but they seem to maintain the same number for the year. So was that just a timing issue? Or anything you can comment on that?

Yes, it was purely timing. Alex, they do expect their lot deliveries to increase throughout the remainder of the year. They had a pretty heavy percentage that they sold to us in Q4, and it was a little bit lighter in Q1, but we would just say that's timing related.

Got it. Thank you so much.

Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live.

Thank you. Can you comment on the pricing environment that's out there and whether the guidance assumes any price cuts because to get to the consolidated revenue guidance, it seems like we need to assume somewhat lower average sale prices.

Our average sales price is primarily influenced by the level of incentives associated with our rate buy downs. This has an effect on the average selling price. We have noticed slight decreases in our net average selling price over the past year, and we anticipate a bit more decline in this figure due to the costs of the incentives tied to rate buy downs. With mortgage rates being higher at the end of the quarter, we expect these costs to increase in the second quarter, which will impact the net average selling price.

So what's a reasonable range for ASP to assume, would it be around 370,000?

Yes, we are not guiding to that specifically. But we've seen modest generally sequentially 1% or 2% change. Really not expecting much more than that.

Thanks a lot.

There were no other questions in queue at this time. I will now turn the call back to Paul Romanowski for closing remarks.

Thank you, Paul. 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 are honored to represent you on this call and greatly appreciate all that you do.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.