$DHI D R Horton Q1 2025 Earnings Conference Call

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 formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 an 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 remain 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 3, 5, and 10-year periods. During the 3 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. Over the past 12 months, we returned essentially all of the cash we generated to shareholders through repurchases and dividends. Overall, the demographics supporting housing demand remained favorable, and 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 buydowns, and we have continued to start and sell more of our smaller floor plans. Our local teams have been successful meeting the market. Net sales orders this quarter decreased 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 in 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 increased 7% to $2.61 per diluted share, compared to $2.82 per share in the prior year quarter. Net 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 gross profit margin on home sales revenues 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 cost 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. Our incentive levels and home sales gross margin for the full year of fiscal 2025 will be dependent on the strength of demand during the spring selling season, in addition to changes in mortgage interest rates and other market conditions.

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 31st were unsold, relatively flat with year-end. 10,400 of our unsold homes at quarter end were completed, of which 1,300 had been completed for greater than 6 months. For homes we closed in the first quarter, our construction cycle times improved a few days from the fourth quarter and approximately 3 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 in inventory and start pace based on market conditions and to achieve targeted closings by community.

Our home building lot position at December 31st 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. Of the homes we closed this quarter, 65% were on a lot developed by either fourstar or a third party, up from 62% in the prior year quarter. Our first quarter home building investments in lots, land, and development totaled $2.4 billion, of which $1.5 billion was for finished lots, $710 million was for land development, and $140 million was for land acquisition.

In the first quarter, our rental operations generated $12 million of pre-tax 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 pre-tax profit margin was impacted by recent uncertainty in the capital markets and higher interest rates for purchasers of rental communities. We continue to operate a merchant build model in which we construct and sell purpose-built rental communities. Our rental operations provide synergies to our home building operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and lot pipeline. We are focused on improving our operational execution and efficiencies in both our rental businesses. During the last several quarters, we have been successful monetizing some of our single-family rental communities prior to lease stabilization. We plan to continue this strategy to improve the capital efficiency and returns of our rental operations. Our rental property inventory at December 31st was $3 billion, which consisted of $728 million of single-family rental properties and $2.3 billion of multi-family rental properties. We expect our total rental inventory to remain around the current level for the next several quarters.

fourstar, our majority-owned residential lot development company, reported revenues of $250 million for the first quarter on 2,333 lots sold, with pre-tax income of $22 million. fourstar's owned and controlled lot position at December 31st was 106,000 lots. 64% of fourstar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $220 million of our finished lots purchased in the first quarter were from fourstar. fourstar had approximately $640 million of liquidity at quarter end, with a net debt to capital ratio of 29.5%. Our strategic relationship with fourstar is a vital component of our returns-focused business model. fourstar's strong, separately capitalized balance sheet, growing operating platform, and lot supply position them well to capitalize on the shortage of finished lots in the home building industry and to aggregate significant market share over the next several years.

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

Looking forward to the second quarter, we currently expect to generate consolidated revenues of $7.7 to $8.2 billion, and homes closed by our home building operations to be in the range of 20,000 to 20,500 homes. We expect home sales gross margin for the second quarter to be approximately 21.5% to 22%, and our consolidated pre-tax profit margin to be in the range of 13.7% to 14.2%. We have added guidance for consolidated pre-tax profit margin to provide more meaningful insight to our overall profit expectations. As a result, we no longer plan to provide specific guidance for quarterly home building SG&A percentage or our financial services pre-tax profit margin. Our results for the full year of fiscal 2025 will still largely be dependent on the strength of the spring. For the year, we continue to expect to generate consolidated revenues of approximately $36 billion to $37.5 billion, and homes closed by our home building operations to be in the range of 90,000 to 92,000 homes. We now forecast an income tax rate for fiscal 2025 of approximately 24%. Based on our strong financial position, first quarter share repurchase activity, and our expectation for increased cash flows from operations in fiscal 2025, we now plan to repurchase between $2.6 billion and $2.8 billion of our common stock for the full year. We also continue to expect annual dividend payments of around $500 million.

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'll be conducting a question-and-answer session. In the interest of time today, we ask the participants to limit themselves to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. 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 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?

Understood. And then in terms of deliveries, it looks like you guys beat by about a thousand units versus the top end, still kind of maintain that 90 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?

Yeah, 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 in the quarter. That's a little bit higher than it typically would be for a December quarter.

Makes sense. Thanks, guys.

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

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

Okay, great. Second question. We're 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 regulation or the future of the GSEs. I'm just curious how you guys are thinking about the next several years in that backdrop and whether you're changing any strategies or doing anything in anticipation of that.

Thanks a lot.

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

Yeah, thanks very much guys. Appreciate the color. It was really encouraging to see the share repurchases you did this quarter, and it's a tough environment, and the cash flow was impressive. I think you guided, you're guiding now continuing to guide for cash flow above 2024. Could you give us a sense for how you're thinking about cash flow from operations relative to your combined share repurchases and dividends? Because I think that might help dial in even a little bit better.

Yeah, that's impressive. Appreciate that. And then the 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 like what kind of cash balance you guys would typically carry? So in other words, what kind of net debt to cap do you think is a good target longer term for the company?

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'm going to talk about SG&A for a second. So, talk, Mike, I think it was you that talked about the growth rate in store count, the growth rate in lots in business, and people you've added. We'll start to anniversary those growth rates, and you've talked about sort of balancing your pace with margins and returns more so going forward. So especially because you're not going to be guiding on this anymore, where do you sort of think your target SG&A ought to be, and when do you expect to see some better leverage on those SG&A dollars? Is it going to be later this year? I know seasonally it'll happen, or will we start to see more in the next couple of years?

You know, 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 on our SG&A. I think today, as we look at fiscal '25, we would expect our home building SG&A percentage probably a little higher than it was in '24, but we certainly expect to leverage those investments as we move beyond '25 into '26 and future years. We will be very focused on maintaining as efficient an infrastructure as we can to support our growth.

Thank you, Bill. And then, you said about 65%, I think, of your total lots you have with finished lot option contracts from developers. The other 35%, can you talk about as self-developed lots and sort of what I call farmer options versus land banking transactions? And can you comment at all about your perspective on land bank transactions versus doing self-development on your own books?

I think, Carl, the 65% we talk about the closings in the quarter were on lots that were developed by a third party or fourstar. So that would be a lot development professional entity that is developing finished lots for us. And that comes from deals they source, projects we source and assign to them, enter into buyback contracts, kind of runs the gamut there. On the self-develop lots, the homes we closed on lots we self-developed, those were all done on our balance sheet. And we continue to explore other accretive ways for capital efficiency, and whether that's sort of that kind of land banking development services, land banking process, we continue to evaluate and are looking to drive the most efficient capital usage in our lot pipeline.

Thanks, Jess. Thanks, everyone.

Thank you. The next question is coming from Michael Rehaut from J.P. Morgan. Michael, your line is live.

Thanks. Good morning, everyone. Congrats on the results. First question, I'd love to circle back to a comment you had in your prepared remarks on inventory levels. The comment was supply is still generally limited at affordable price points. I'd love to dial into that a little bit and see if there's any regional differentiation that you've seen across inventory levels and, as a result, perhaps which markets or regions that you operate in might be a little stronger versus a little weaker than the corporate average.

Okay, appreciate that. Secondly, your option lot percentage at 76%, I think you kind of 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 kind of staying in that year to year and a half range. So as we look forward, I know you're 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's any rethinking of where that option lot percentage or years owned supply might be able to go over the next 3 to 5 years?

Well, Mike, our average is 76% across our operations. We do have markets that it's 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're utilizing fourstar 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.

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 questions. So the closings guidance, I think for the second half, that implies something like...

Mr. Bouley, your line seems to have dropped. We'll move to the next question.

Thank you. That concludes our question-and-answer session. I will now turn the call back over to Paul Romanowski for closing remarks.

Thank you for joining us today. We appreciate your interest in D.R. Horton. Have a great day.

52,000 homes closed or maybe 30% or so higher than the first half. I think it's 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. It sounds like better cycle times as you keep alluding to for sure. Is that part of that? But any other assumptions we should consider that you're making in that kind of step up there? Thank you.

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 sold and closed during Q2 would be similar to December or lower than December? And conceptually, at what point would you look to kind of more hold the line on the gross margin? Thank you.

All right, thanks guys. Good luck.

The next question will be from Sam Reed from Wells Fargo. Sam, your line is live.

Awesome, thanks so much. So maybe to 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 buy-down rate is in your backlog? I believe you've provided that in past quarters, so just curious if we've got an updated number there.

No, that helps. And then maybe more of a higher level: labor costs and stick and brick costs. It sounds like those are looking to hold in Q2, although correct me if I'm wrong. But maybe could you just talk a little bit more broadly about your ability to manage higher costs on these two buckets from some of these exogenous factors we're seeing, whether it's the new administration's tone on immigration or higher material costs on the back of natural disaster rebuild? Just trying to get your rough sense of how you'd manage through those should we see inflation in labor and stick and brick? Thanks.

That's helpful. Thanks so much. I'll pass it on.

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

Good morning, thanks. Few things if I could. First of all, in terms of affordability, I'm curious as you think looking forward, I think your ASP indicated is down 1%. Is there something more meaningful that you're 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 and changing the product and changing your ASP?

Okay, and then secondly, I know as you look forward to the spring selling season, rates were seven, rates for six, rates are seven. Is your customer behaving differently with rates back at seven? Curious especially in an environment where it feels like we're 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?

Thank you.

Thank you. The next question will be from Anthony Patari from City. Anthony, your line is live.

Good morning. I wonder if you can give an update on what you're seeing with consumer debt levels and if you're seeing any real change in sort of availability or ability to qualify. And then when you look at kind of the first true first-time buyer versus more of a move-up, is one group maybe holding up better than the other?

Okay, that's helpful. And then just following up on smaller format homes or products like townhomes 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?

Okay, when we miss we have some disparity.

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

Thanks for taking my questions. I wanted to ask about the pre-tax margin guidance. I appreciate that going forward you want to frame your business this way. But if I look at it, you're guiding pre-tax margins at the midpoint down 280 basis points year on year, and gross margins you're really only guiding down 150 basis points. So it seems like there is something else kind of underneath the surface, whether it's on rentals or fourstar this quarter specifically in terms of Q2. So can you help us understand that?

Okay, got it. So year-on-year rental revenue and margin down significantly, biggest driver. Yes, got it. And then I guess going back to kind of the price versus pace discussion. I guess as you think about it, and again you've added some additional slides around the return focus and changed the way that you're guiding certain things. So I know you've been return focused for a while, but in the current environment, is that focus actually shifting you to be a little bit more biased towards let's keep things a little bit more price and margin focused versus volume in the near term? How would you say that your views are evolving there?

I got you. Okay. Thank you.

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

Hello everybody. Happy New Year. Could you give color around the margin spread between the 47% backlog closings and the 53% spec? As well as comment on, because you're at 126 markets, most of the builders are in top 50 markets for most of their closings. Could you also talk maybe about the margin spread we see between those top 50 markets and your other 76 markets?

Okay. I think in the past you guys talked about a couple hundred basis points being multi-years ago, so I didn't know if that might be a build order versus spec a little different. 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? You know, because Florida, Texas, the West, they're all pretty similar in that 60% 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.

Thank you.

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

Great, good morning. Thanks for taking my questions. First, I wanted just on the land inflation that you're seeing today. I think you said up 3% quarter over quarter. Can you just remind us like what that implies for the year-over-year trend? And then how do we think about that for remainder of the year? I mean, how does that compare to what you're contracting today? Are you seeing any relief there that we'll see flow through later on?

Okay, that's helpful. And then just on the change in the share purchase outlook, especially the pace. If you stepped it up in the guidance, can you talk about if you have continued that pace to buyback quarter to date? And then how do we think about sort of the pace as we go through the year? Was the step up in buyback in the quarter related to just where the stock price was, or is there any change in sort of philosophy or strategy in terms of the pace of capital return relative to free cash flow?

Thank you. Appreciate it.

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

Hi, good morning. Thank you for taking my questions. First, can you just talk about any differing 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 on Texas and Florida would be helpful.

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

Thank you.

The next question will be from Buck Horn from Raymond James. Buck, your line is live.

Hey, 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? 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?

Okay, thanks. That's all for me. Thanks, appreciate it.

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

Thank you. 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 versus say last year, but rates realize some level of stability as a result of that, do you think 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?

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?

Okay, that's helpful. Thank you. Good luck with everything.

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

Thanks everybody. And to get started 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 as 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.

You got it. And then wondering if you can comment on Fourstar. It seems like their 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?

Got it. Thank you so much.

Thank you. The next question will be from Jade Ramani 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.

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

Thanks a lot.

Thank you. 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 DR 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.