DHI Stock | DR Horton Inc Q2 2022 Earnings Call

Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray and Paul Romanowski, our Executive Vice President and Co-Chief Operating Officers, and Bill Wheat, our Executive Vice President and Chief Financial Officer. The DR Horton team delivered an outstanding second quarter, highlighted by a 59% increase in earnings to $4.03 per diluted share. Our consolidated pre-tax income increased 60% to $1.9 billion on a 24% increase in revenues, and our consolidated pre-tax profit margin improved 520 basis points to 23.5%. Our home building return on inventory for the trailing 12 months ended March 31st was 40.3%, and our consolidated return on equity for the same period was 34%. These results reflect our experienced teams, their production capabilities, and our ability to leverage DR Horton's scale across our broad geographic footprint. Housing market demand remains strong despite the recent increase in mortgage rates, and we are focused on maximizing returns while continuing to aggregate market share. There are still significant challenges in the supply chain, including shortages in certain building materials and a very tight labor market. Our construction cycle times were extended further this quarter, and we continue to work on stabilizing and then reducing our cycle times to historical norms. After starting construction on 24,800 homes this quarter, our homes in inventory increased 30% from a year ago, with only 600 unsold completed homes across the nation. With 33,900 homes in backlog, 59,800 homes in inventory, a robust lot supply, and strong trade and supply relationships, we are well positioned for consolidated revenue growth of greater than 25% this year. We believe our strong balance sheet, liquidity, and low leverage position us to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our home building operations while managing our product offerings, incentives, home pricing, sales pace, and inventory levels to optimize returns.

In closing, our results and position reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint, and diverse product offerings across our multiple brands. Our strong balance sheet, liquidity, and low leverage provide us with significant financial flexibility to continue aggregating market share and effectively operating in changing economic conditions. We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire DR Horton team for your focus and hard work. We are incredibly well positioned to continue growing and improving our operations during the remainder of 2022 and in future years. This concludes our prepared remarks; we will now host questions.

Carl, I think it was all our decision to slow sales orders based on production capacity. I think we saw, and continue to see, very good demand and more buyers—qualified buyers—out there for our homes today when we release them for sale. But we did see during the quarter that our cycle times continue to extend, and we made the decision in several of our geographies to delay the release of homes until we could give a better delivery date to those customers and provide a better experience for them in the backlog process. So we saw very strong demand in the quarter, but we did see the cycle times elongate. I think we added two weeks this quarter, unfortunately, and we wanted to make sure we did not create more buyers in backlog with an unhappy experience.

Sure, Carl. We put out pretty much what we're going to say about Vidler in in the press release, in terms of them owning a portfolio of premium water rights and other water-related assets across several of our Southwest markets that generally lack adequate supply. We mentioned the total value of the transaction is approximately $290 million, and we do expect it to close in the next month or two. But considering it's subject to the successful completion of a tender offer, we don't have much more to say at this time, and I look forward to talking about that in coming quarters after it closes.

Thanks, John. You know, we're always focused on aggregating market share, and we're positioning ourselves to continue to do that through any economic cycle. Certainly at some point, the impact of rates and impact of affordability will have some impact on demand, and we certainly will adjust our capital allocation at that time. But we believe we're in a strong position to continue to grow. But certainly those impacts on demand would impact our investment decisions in land at that point in time.

From the overall option lot percentage, we have been focused on it. We're going to continue to focus on it. Obviously, it's going to be capped at 100%, but our goal is just to continue to get better and more efficient. And as for Four Star, we're very happy with Four Star. At some point, yes, it will deconsolidate, but there's still a lot of markets that we think we can help scale Four Star into. And if you look at just the earnings we're making—our shareholders are making—Four Star is a very good investment, and kind of not a bad place to be. But yes, at some point it'll deconsolidate, but it's more geared toward their platform build-out than it is our desire to liquidate some percentage of our shares.

Stephen, I think to your first question, in terms of community design, plan design, we are going to continue to focus at the affordable range and work towards those buyers. I don't see a significant change in how we build what we build. But if it continues to be a push on affordability, then we'll put the appropriate homes in place. It may mean some smaller homes, but not a significant shift from where we are today. In terms of our communities and in our sales offices, certainly there is concern from the buying public over rates. But selling later in the process like we do, we don't have as much exposure as we could if we were selling far out to the ship and rate conditions. That's why we've continued to restrict our sales to a later timeframe so that we're putting people in backlog at closer to the rate that they're going to close at.

Yeah, so I looked at it actually on a forward-looking basis, and we have essentially—our next month, so April, 100% locked. And then as you would expect, that percentage ticks down, but it's the majority of the quarter's closings that are locked. And you've got to get to four-plus months out before that's a more de minimis percentage.

Thank you. We do see a lot of very strong demand and strong execution on the pricing. We do not sell any of our communities at this point during the development phase; we're selling them at the lease-up phase, at stabilization. So we're seeing still very good demand and very good pricing execution on those transactions that we have closed on. So current outlook, you would expect cap rates could be affected by rising interest rates, but we're also seeing very strong leasing demand and very strong rental growth, which certainly affect cap rate outlooks. And at a 40% to 50% plus margin on these sales, if the market were to soften a bit, we still expect to generate very strong profits and returns.

Well, I think you've got certainly municipality challenges through the entitlement process in terms of bringing new lots to the market. And we still haven't seen full return of municipalities when you're talking about permitting and or inspection process. So it certainly is impacting some of that as we work through the supply chain challenges. And then when you finally move homes on to the next stage, we do see some delays in inspections and some of the municipality services that we receive, so it's certainly been part of the impact to our cycle time extension.

I'd say the overall land market has has

You know, tracked the sales price of homes. So it is good to be in the position where we control 550,000 lots at prices contracted two years ago, three years ago, four years ago, and not be in a position today where we have to go buy something. So we are looking at that, we're monitoring it. I believe liquidity is going to drive market share gains, and the ability to not be at risk of credit markets is a huge competitive advantage for us, and we're going to protect that. We're going to be conservative in our land searches. I mean, there are good deals out there that we put under contract this year that we will take to close, but we are not in a position where we have to go buy anything, and we're going to see a significant benefit for that as we proceed through this market. Thank you, good luck.

Matt, we're very much a bottom-up, community-level driven company, and we're going to evaluate demand we see at each individual community and sub-market and look for home starts to match that demand that our local operators are seeing. And that couples with community replacement needs in those sub-markets based upon demand we see in real time in the field. So in the near term, we'll continue to adjust starts. In the more medium term, we'll look at subdivision openings and phase sizing, and as well as Paul touched on before, we may be adjusting some product to some smaller sizes if that's appropriate for the given market.

You know, the rate increase is eliminating some people from the home buying experience, but we still have more qualified buyers trying to buy homes than we can produce today. One of the things that really has impressed me, back in 2018 when you saw a rapid rise in rates, demand just was significantly reduced. And then after the rate shock was mitigated, we saw demand come back and come back strong. But through this cycle, which is an even more rapid rate increase, yes, we've had people that don't qualify anymore, but the demand side is still very strong. So just the desire to own homes, and it may be the fact that prices have escalated very fast and rents are escalating even faster than the price of new homes, and I talk about inflation and then locking in your housing costs for 20 years. I mean, home ownership is a cherished thing today, and the people coming out of the millennials or even individuals relocating from other markets to where the growth is taking place, they just want to own a home, they want to lock in their housing costs, and they want to get into neighborhoods that they can raise families in.

Truman, I think on the markets, we see markets have varying levels of performance in demand, but they're all very strong relative to where they've been. Certainly the migration patterns within the country and the areas that are gaining population have incredibly strong demand, but markets across our footprint we still see more buyer demand than we have production capacity for today. And so we're still very encouraged by that. Some of those buyers have been in the marketplace for quite a while, others are more recent entries, but we don't have any hard data we could share with you on how exactly long they've been conducting their search.

Thanks.

You know, I've been doing this for a long time, and the desire to own a home as part of the American culture gives you a sense of safety and a nest to build your family. The downturn in '08, '09, '10, where home values were just decimated, that put a big pause on the desire to own homes. I think as this cycle continues and I think it's going to continue to elongate, the housing formation, the desire to get close to neighborhood schools, all those things, it kind of returned home ownership to the American dream again. So getting in a home today is hard, but it's not nearly as hard as it was when I bought my first one. It feels like it's almost a cultural shift from our return to family, community, and I think the demand is significantly higher than the homes that can be produced.

You know, I don't know that it's going to force a larger M&A program. I do think that their inability to secure financing to move forward on different projects or even to start houses is going to open up market opportunity for us, both in our ability to aggregate market share on the home sale side and the ability to control longer and longer land positions at very favorable numbers. So when you look at the impact of a two-plus month expansion of our cycle time and what that's done to our liquidity, and then understand that we are still building houses much faster than anybody else and we started at and are going to continue to protect a very strong liquidity position, I got to believe there's tremendous pressure on the especially private builders. And at some point, these guys have made a lot of money over their careers and they're guaranteeing loans, and at some point you're just not going to put everything at risk. So I do think it's going to open up market share gains for us, and we are very well positioned to take that market when it does open.

You know, I think the ability to produce great value at the lower end is a tremendous advantage that we have. The buyer pool is significantly deeper there. Qualification may be a little tougher, but people really want to buy a home, especially their first time. So I see that segment of our business just continue to get stronger. And whereas somebody may have pushed up in price at a very low rate, which we had a lot of first-time homebuyers buying in the Horton brand, ultimately it comes down to payment. And if their desire is to own the home in a very nice community location, our competitive advantage just gets better and better.

Thank you, Holly. We appreciate everybody's time on the call today and look forward to speaking with you again to share our third quarter results in July. And to the DR Horton family, Don Horton and the entire executive team, thank you and congratulate you on delivering an outstanding second quarter. We are incredibly well positioned today. You once again have proven you are the best of the best in this industry. Thank you.