D.R. Horton, America's Builder, held an earnings conference call to discuss their third quarter 2023 results. At the call, Jessica Hansen, Vice President of Investor Relations, warned that forward-looking statements should be taken with caution, and that additional information about potential changes in performance can be found in their SEC filings. David Auld, President and CEO, then took over the call.

D.R. Horton's third quarter earnings were strong, with pre-tax income of $1.8 billion and net sales orders increasing 37% from the prior year. Despite high mortgage rates and inflationary pressures, the company was able to increase homebuilding starts to 22,900 homes this quarter. Homebuilding operating margins are lower than the record high from last year due to cost inflation and pricing adjustments, but have improved sequentially from the March to June quarter.

The third quarter of fiscal 2023 saw a decrease of 16% in earnings per share and 19% in net income on consolidated revenues of $9.7 billion. Net sales orders increased 37% to 22,879 homes, and order value increased 26% from the prior year. The average price of net sales orders was $381,100, down 8% from the prior-year quarter. Incentives and smaller home sizes were used to adjust to changing market conditions and higher mortgage rates, and incentives are expected to remain high. Sales volumes can be significantly affected by changes in mortgage rates and other economic factors.

In the third quarter, homebuilding gross profit margin increased by 170 basis points sequentially due to lower incentive costs and stick-and-brick costs. Homebuilding SG&A expenses increased by 6% from the prior year, while construction cycle time decreased by over a month from the second quarter. The company started 22,900 homes in the June quarter, with 43,800 homes in inventory, and 25,000 of those homes were unsold. The company plans to continue to adjust their home and inventory starts based on market conditions.

Mike Murray discussed the company's homebuilding lot position, which consisted of 555,000 lots, 25% of which were owned and 75% of which were controlled through purchase contracts. Paul Romanowski discussed the company's rental operations, which generated $162 million of pre-tax income on $667 million of revenues from the sale of 1,754 single-family rental homes and 230 multi-family rental units. Bill Wheat discussed Forestar, the company's majority-owned residential lot development company, which reported total revenues of $369 million for the third quarter on 3,812 lots sold with pre-tax income of $62 million. Forestar's owned and controlled lot position at June 30 was 73,000 lots.

Forestar and D.R. Horton have a strong balance sheet with a net debt to capital ratio of 19.1% and liquidity of $780 million. DHI Mortgage had a pre-tax income of $94 million and handled 74% of the buyers' financing. The company has a balanced capital approach with low leverage and significant liquidity, providing them with $2.6 billion of unrestricted homebuilding cash and $2 billion of available capacity on their homebuilding revolving credit facility. DHI Mortgage's borrowers had an average FICO score of 723 and an average loan to value ratio of 88%, with 56% of the closings being first-time homebuyers.

Lennar Corporation reported strong financial performance for the end of June, with stockholders' equity at $21.7 billion and a return on equity of 24.3%. The company paid out $85 million in cash dividends and repurchased 3.1 million shares of common stock for $343 million during the quarter. Looking forward, Lennar expects to close between 82,800 and 83,300 homes in their homebuilding operations and between 6,500 and 7,000 homes and units in their rental operations. Additionally, they are expecting consolidated revenues of $34.7 billion to $35.1 billion and cash flow from operations of greater than $3 billion.

David Auld concluded the prepared remarks by expressing appreciation to the D.R. Horton team and discussing the company's disciplined approach to investing capital. Stephen Kim then asked about the company's pace of construction and goals for the future, inquiring whether the company could reach the level of 25,000 units per quarter that it had achieved in the past.

Paul Romanowski discussed the company's 30-day reduction in cycle time and the consistency and improvement in their divisions. He also noted that the starts pace had ticked up and stayed consistent with closings, which is the cadence they expect to see in the fourth quarter. When asked about the 25,000 starts per quarter, David Auld noted that they are focused on incrementally increasing starts quarter to quarter. He also gave guidance on their rental platform, noting that revenue will be higher in the fourth quarter but margins will be lower, and that their level of investment in rental inventory is currently at $3.3 billion and is expected to grow in the future.

The company has a total of $3.3 billion in inventory and expects to continue to grow that platform over the next couple of years. The community count is up 9% year-to-date, and the company is working to consolidate labor availability capacity and increase market share. The company is expecting a lower profit margin in the fourth quarter due to a mix of projects that are delivering between Q3 and Q4.

Jessica Hansen has mentioned that the company has the lot position to open new communities and is expecting to grow their flag count closer to mid-single digits quarter-to-quarter. Paul Romanowski has added that the company is looking to return to a more historic inventory turn level in the upcoming year and David Auld has mentioned that this is a factor in their start pace in order to deliver houses faster and more efficiently.

Paul Romanowski and David Auld discussed the normal seasonality of orders from the second quarter to the third quarter, which was better than usual, and their expectation that orders will continue to show a bit closer to normal seasonality going forward. They are also hoping to see more consistency over the longer term, but acknowledge the natural ebb-and-flow of consumer demand. They believe that they will have more houses to sell this year due to their shortened cycle time and ability to give people a date certain to close.

David Auld of D.R. Horton explains that the company has been focused on simplifying their business and creating a level of consistency that didn't exist before. He attributes their success to their balance sheet, liquidity, power of the platform, people, location, product, and affordability. He believes that this has allowed them to take advantage of disruptions in the market since 2019 and consolidate their markets.

Carl Reichardt asked Bill Wheat about the components of the home that have contributed to a 4% decrease in construction costs year-on-year, with lumber being the primary factor. Bill mentioned that there have been some minor changes in the other components of the home, and that labor costs have started to come down as well. He also mentioned that as they continue to add scale, including their rental platform, they will have advantages to drive their cost structure down. David mentioned that private builders have experienced normal seasonality, but that the market may be slower than expected.

David Auld and Jessica Hansen discussed the recent acquisition of Truland in the Gulf Coast region and their relationship with Nathan Cox, who has been a part of their culture for 15 years. They also discussed the difficulty of finding new private partners due to the increasing cost of capital. Finally, they responded to a question about the demand and order trends for the fourth quarter.

Jessica Hansen, of Lennar, states that the company is focused on long-term results, not quarterly results. She believes that the company is positioned to increase their starts slightly from the third quarter, and that their construction cycle times and flag count have improved, leading to the possibility of better than normal seasonality. She also notes that if the market weakens or they don't get as many homes started, it could be less than normal seasonality.

Bill Wheat states that they are positioning themselves to deliver close to a double-digit growth, high-single, 10% type growth in the upcoming year by focusing on their lot positions and homes in inventory. He also mentions that improved cycle times help them improve their inventory turnover and that they focus more on inventory conversion than backlog.

Mike Murray discussed the flat lot costs on a per square foot basis, which was surprising given the lot shortage. He explained that the closings are from lots that were contracted and acquired some time ago and that going forward, lot costs are expected to increase due to a lot scarcity. There has been inflation in land, lot development, and finished lot prices.

Paul Romanowski discussed the effectiveness of mortgage rate buydowns as an incentive, noting that they have stayed roughly one point below the market. He also stated that they will have to measure their rate buydowns depending on where rates move, up or down. Eric Bosshard asked about the path of gross margins from here, and Paul Romanowski noted that they have done a good job historically outlining ranges and that the world is stabilizing for them.

Bill Wheat and Mike Murray have discussed the visibility they have into the backlog and recent sales, noting that the costs of recent starts have been lower, leading to a modest improvement of margin up to the high-23%-to-24% range in Q4. Eric Bosshard then asked if the buying rates down a point below market, which has been a catalyst for consumers to sign contracts, is the way it will remain, or if consumers are becoming more comfortable with higher interest rates. Paul Romanowski then answered the question.

The interest rate buydown has been a popular incentive used in the market and is adjusted based on the needs of buyers. Jessica Hansen discussed the use of the incentive in the third quarter and the ability to match the EPS to cash flow. Mike or someone else will discuss the 53% of option lots that are expected to be finished and the cost of raw first developed lots.

D.R. Horton is expecting to purchase more than 60% of their lots from third-party developers, with the 53% they mentioned in their remarks being a floor rather than a ceiling. The company has teams in place that are capable of developing their own lots or negotiating to buy finished lots from third-party developers. The improvement in their cycle times and homes in inventory turnover is driving the big move in their capital and cash flow relative to their earnings.

Paul Romanowski explains that lot development is important to their starts pace and that they will make the decision community-by-community. Bill Wheat suggests that the industry has improved because of a shift in focus to returns, and that this has led to increased efficiency and improved returns on capital.

Jessica Hansen spoke about a well-publicized deal between the company and a large SFR company, but did not provide specifics. She noted that the company's disclosures on a unit basis would show the number of completed homes and rental units they have, and that they will continue to do individual sales and packages of sales.

Jessica Hansen and Mike Dahl discussed the growth of the business in 4Q and in '24, with a breakdown of the unit breakdowns for multi-family and single-family. Alan Ratner commented on the impressive progress of cycle times and cost, likely due to the pull back in starts the industry saw late last year and the negotiating power over trades and lumber. It is clear that the industry start pace will be accelerating for the next handful of quarters.

David Auld and Jessica discussed the sustainability of the progress they have made on cycle times and costs, as well as the need to aggregate market share and trades. They are focusing on making the job easier and more profitable for trades without renegotiating prices. Alan Ratner asked about the share of closings that had mortgage rate buydowns and if there was any sensitivity to demand in the communities where they are dialing back those buydowns.

Paul Romanowski and Alan Ratner discussed the ability of buyers to access rate buy downs, which has been reduced by 10% compared to previous quarters. Mike Murray then discussed how the banking environment has impacted Horton's developer partners, noting that they have a long relationship with them and that they have not seen them pull back on spec construction or land deals.

Jessica Hansen of the company discussed how the banking industry is being more selective in who and at what levels they are choosing to support third-party developers. She also noted that the company has seen an opportunity to help private builders with liquidity and opportunities by taking some of their lots or stepping into different positions. Hansen reported that buyers want as much square footage as they can get, but are constrained by what they can afford, which is why the company has started more and more of their smaller floor plans.

Paul Romanowski and Mike Murray discussed the improvement of build cycles, which have come down 30 days from peak levels and are now at five-and-a-half months, slightly above their historical averages. They expect to get back to their historical levels in the fourth quarter, with a further 45-60 days to reach the home closing date. Rental profits are expected to be down in the fourth quarter despite an increase in units.

D.R. Horton's gross margins for the fourth quarter may be lower than usual due to the mix of projects and higher construction costs, but the company expects pre-tax margins to remain higher than homebuilding margins overall. David Auld concluded the call by congratulating the D.R. Horton family on a solid third quarter and encouraging them to continue to compete and win every day.

This summary was generated with AI and may contain some inaccuracies.