The operator welcomes listeners to the earnings conference call for D.R. Horton, America's Builder, and introduces Jessica Hansen, Senior Vice President of Communications. Jessica Hansen discusses forward-looking statements and provides information about where to find the company's earnings release and investor presentations. David Auld, Executive Vice Chair, then thanks Jessica and greets listeners.

The speaker is pleased to be joined by the company's President, CEO, COO, and CFO on the call. They congratulate the new CEO and discuss the company's solid fourth quarter results, including earnings of $4.45 per diluted share and a pre-tax income of $2 billion. They also mention a record number of homes and apartments closed, strong cash flow, and high net sales orders. Despite challenges such as high mortgage rates and inflation, the company remains optimistic due to limited affordable housing options and favorable demographics.

The company is focused on increasing their market share by providing affordable homes and improving their housing inventory turns. They have experienced operators, flexible lot supply, and strong financial positions. Earnings and net income decreased in the fourth quarter and for the year, but net sales orders and order value increased. The average closing price for the quarter also increased. The company's cancellation rate increased from the previous quarter but decreased from the prior-year quarter. The average number of active selling communities also increased.

In the fourth quarter, the average price of net sales orders increased slightly and gross profit margin on home sales revenues also increased. However, to address changing market conditions and higher mortgage rates, the company has increased their use of incentives and reduced the size of their homes. They expect to continue offering higher incentives in the next fiscal year. Homebuilding SG&A expenses increased slightly but the company will continue to control them while ensuring adequate support for their business.

In the September quarter, the company started 21,100 homes and ended the year with 42,000 homes in inventory. They expect further improvements in their cycle times and housing inventory turns in fiscal 2024. Their homebuilding lot position at September 30th consisted of approximately 568,000 lots, with 25% owned and 75% controlled through purchase contracts. In the fourth quarter, their homebuilding investments in lots, land, and development totaled $2.3 billion. Their rental operations generated $217 million of pre-tax income on $1.4 billion of revenues from the sale of 3,006 single-family rental homes and 1,582 multifamily rental units. For the full year, their rental operations generated $524 million of pre-tax income on $2.6 billion of revenues from the sale of 6,175 single-family rental homes and 2,112 multifamily rental units.

The company's rental property inventory at the end of September was $2.7 billion, with a significant increase in revenues and profits from rental operations. Due to market volatility, no separate guidance for rental closings in fiscal 2024 was provided. Forestar, the company's residential lot development company, reported strong revenues and profits for the fourth quarter and full year. Financial services also had a strong performance, earning pre-tax income of $85 million in the fourth quarter and $283 million for the year.

The mortgage company's loan originations were mainly for homes closed by the homebuilding operations, with FHA and VA loans making up a significant portion. The average FICO score for borrowers was 725 and first-time homebuyers accounted for 55% of closings. The company has a disciplined and flexible approach to its capital, with strong liquidity and low leverage. They generated significant cash flow over the past five years and have no senior note maturities in the upcoming fiscal year. Stockholders' equity and book value per share have increased, and the company paid dividends and repurchased shares during the quarter.

In the previous year, the company repurchased 11.1 million shares and increased their quarterly cash dividend by 20%. They expect challenging market conditions in the first quarter of fiscal 2024, but are well positioned to continue gaining market share. They anticipate a financial services pre-tax profit margin of 20-25% and an income tax rate of 24-24.5%. For the full year of fiscal 2024, they forecast consolidated revenues of $36-37 billion and 86,000-89,000 homes closed by their homebuilding operations. They also expect an income tax rate of 24-24.5% for the full year.

The company expects to generate $3 billion in cash flow from homebuilding operations and plans to use it for share repurchases, dividend payments, and maintaining financial flexibility. They credit their experienced teams and strong balance sheet for their success and plan to continue investing capital and returning capital to shareholders. The executive vice chair, David Auld, thanks the team and announces his departure from the company. The first question on the earnings call is about the higher-than-expected gross margin of 25.1%.

In the second half of the fiscal year, the company saw stability in the rate environment and was able to level off incentives. They also had a slight increase in average sales price and benefited from lower lumber costs. However, they expect a decline in gross margin in the first quarter due to higher incentives and costs, as well as the recent rise in interest rates. The company sells a significant number of homes in the same quarter they close, so their margins are a real-time indication of the business.

During a conference call, an operator introduces a question from Stephen Kim of Evercore about the company's recent results. Kim asks about the projected $3 billion in homebuilding cash flow for the next year and how much of it will come from a reduction in work in process inventory. The company's representative, Bill Wheat, explains that they are seeing improved inventory turns and cycle times, which will contribute to the cash flow but may not result in an actual decrease in inventory. Kim also asks about the average rate used for customers in the September quarter and the current average rate being offered. The company's representative, Paul Romanowski, states that they tend to stay about 1 to 1.25 points below market and are currently offering rates around 5.99% for FHA loans and 6.25% for conventional loans.

Paul Romanowski of the company states that 60% of their closings involve some form of rate buy-down, with an average rate of around 6%. Joe Ahlersmeyer from Deutsche Bank asks about the company's inventory turns and their guidance for the full year. Jessica Hansen responds that their starts will decrease slightly but gradually increase throughout the year to meet their guidance and position themselves for growth in 2025. They are working to improve their production capabilities and ensure sustainable growth.

The company's return on inventory is expected to settle in the high 20s, with a focus on purchasing finished lots. There may be a mix shift in geography and price points, with a potential increase in deliveries from smaller markets where the company is the only large builder. The company also plans to introduce smaller home plans to gain municipality approvals.

The speaker discusses the company's strategy to maintain affordability and deliver more homes with compressed construction times. The company has also updated its market share data to include all 118 markets it operates in, with plans to become number one in all of them. The speaker also mentions that they cannot provide guidance on the rental business in 2024, but mentions that there is a lot of capital chasing both multifamily and single-family assets.

In the paragraph, Paul Romanowski discusses the current interest from institutional investors and the volatility in gross margin due to higher rates. He also mentions the company's position as a dominant supplier of single-family rental and its plans to grow its multifamily platform. In response to a question from Mike Rehaut about the company's fiscal 2024 closings growth guidance, Jessica Hansen explains that the company is expecting to see growth within a range of plus or minus 10%, with an expected improvement in cycle times.

The company is expecting to close the year strong, with a strong sales performance and a good lot position. They are also seeing modest inflation in construction costs, with sticks and bricks costs down but lot costs up. They are positioning themselves for growth in the future, but also being conservative in their outlook.

In paragraph 17, the speaker discusses the expected inflation in lot costs and stick and brick categories for fiscal 2024. They also mention the recent moderation in lumber costs and the potential for downward pressure on prices due to the current interest rate environment. The company is also shifting towards smaller floor plans to address affordability issues, which could impact their reported average sales price. The speaker also mentions that sales pace may react quickly to interest rate changes and shares some insights on their sales pace in October and November.

The company is pleased with their sales so far in October, despite fluctuations in traffic due to changes in interest rates. They will continue to focus on meeting the market and starting new houses in the spring. On the rental side, they expect margins to compress due to rising interest rates and increased supply in the multifamily market. The team carefully considers the supply and demand in each submarket when deciding to move forward with projects.

The speaker expresses confidence in the company's ability to meet demand and reports positive lease-ups in rental properties. The next question from an analyst is about the sustainability of rate buydowns and the potential impact of margin and cost inflation. The speaker emphasizes the company's focus on returns and mentions a mix of cost factors that affect margins. The company is starting the year with a strong performance, but gross margins are expected to decline in the first quarter.

The company has a healthy gross margin and good access to credit, but there may be some headwinds from credit tightening in the market. The company is working with its vendors and suppliers to navigate this. The analyst asks about the impact of higher rates on different types of buyers, and the company responds that they offer affordable options for all buyer types, but it is unclear if there is a specific group that is better positioned to weather higher rates.

The company's primary focus is on affordability for buyers, achieved through monthly payments and smaller product footprints. They are targeting first-time homebuyers who need a place to live and are competitive with the rental market. The company is now providing more detailed guidance for the year, as they have successfully managed through higher rates and supply chain challenges.

The speaker discusses the challenges the company faced in determining which homes to finish and deliver, as well as the impact of the rate buy-down process. They also mention the past CEOs' focus on gross margins and asset turns, and ask the current CEO to comment on the company's current approach and exposure to non-top 50 markets. The current CEO emphasizes the alignment and focus of the team and the company's continued focus on returns in each community.

The company has a strong team and operation in place, with a good playbook that is executed daily. The company's goal is to be the low-cost provider of affordable housing and create opportunities for first-time homebuyers. The industry has matured and there is a focus on returns, cash flow, and derisking land pipelines. The company's internal focus is on driving efficiency and simplifying products to make housing available for first-time homebuyers.

The company's focus is on sustainability, scalability, consistency, and transparency. The CEO, Paul, and the rest of the team are aligned and working well together. The company is well-positioned and has a strong focus on returns. Over 60% of the houses being closed were developed in the past fiscal year by third-party developers. The company expects to take down at least 54% of finished lots and continues to build developer partnerships in all markets.

The speaker expects to see an increase in the number of fully developed lots purchased in the future as they derisk their balance sheet and lot pipeline. They also anticipate mid to high single-digit growth in community count for fiscal 2024. The company plans to buy back $1.5 billion in stock, reflecting their confidence in cash generation and future cash flow.

The speaker discusses the company's increased certainty in their growth and cash flow, which allows them to allocate capital towards repurchases, dividends, and distributions to shareholders. The questioner asks about the 11% increase in lot costs in the fourth quarter and if it will continue into fiscal 2024. The speaker explains that it is the current run rate, driven by inflation in land prices, development costs, and longer development timelines. There is still a shortage of lots in the market for builders.

The company is uncertain about the future of lot cost inflation and expects it to be higher than other inflation in 2024. They are closely monitoring the rental market and intend to continue growing their platform, but will adjust accordingly to market conditions. They see strategic value in their multifamily development business and will continue to scale it, but will also be responsive to market conditions.

During a conference call, Jade Rahmani from KBW asked about the percentage of buyers utilizing mortgage buy-downs and interest rate incentives, as well as the exit cap rates for the rental business. Paul Romanowski stated that about 60% of buyers utilize some form of rate buy-down, with the majority being permanent 30-year buy-downs. Michael Murray explained that the exit cap rates vary significantly by market and interest rate environment, making it difficult to provide a specific range. He also mentioned that the company has been conservative in their underwriting and expectations for their single-family rental business.

The speaker, Jessica Hansen, responds to a question about potential margin declines in the future. She states that the company is prepared to handle any market conditions and will adjust accordingly. She also mentions that they cannot give a full-year guidance and that the spring season will be a major factor in determining their overall margin for the year. She also notes that in a downward housing market, they have the ability to adjust their cost structure to match the market. Overall, she expresses confidence in the company's ability to weather any challenges that may arise.

The company is optimistic about their performance in 2024, as they are well-positioned to produce houses efficiently and drive strong returns. They expect to see an increase in cash flow from homebuilding operations, but there may be some offsets from investments in multifamily properties. The single-family market is uncertain and will depend on market conditions and interest rates.

The speaker, Michael Murray, discusses the flexibility of the company's build-to-rent portfolio and their ability to respond to market demands in real time. The operator then thanks everyone for their participation and the CEO, David, for his leadership. The speaker, Paul Romanowski, also expresses gratitude to the D.R. Horton team and looks forward to their continued success in the upcoming fiscal year.

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