The operator introduces the conference call for D.R. Horton's third quarter 2024 earnings. Jessica Hansen, Senior Vice President of Communications, mentions that the call includes forward-looking statements and reminds listeners to refer to the company's annual and quarterly reports for more information. Executive Chairman David Auld pays tribute to the company's founder, Don Horton, who passed away in May.

Don was a dedicated and hardworking man who played a crucial role in establishing the foundation and culture of D.R. Horton. His mission to help Americans achieve the dream of home ownership has driven the company's success for over 45 years. Despite his passing, his legacy and impact on the company will continue to be honored and preserved. The company is grateful for the support and condolences received from employees, industry leaders, and others. The call is then turned over to the company's president and CEO, Paul Romanowski.

The third quarter results of D.R. Horton were solid, with earnings increasing by 5% and pre-tax income increasing by 1%. The company also generated strong cash flow and has a high return on inventory and equity. Despite challenges in affordability, there is still a demand for housing. The company remains focused on increasing efficiency and returning capital to shareholders. The Executive Vice Presidents, Mike Murray and Bill Wheat, also joined the call and reported that earnings for the quarter increased by 5% to $4.10 per diluted share, with net income of $1.4 billion on consolidated revenues of $10 billion.

The company's third quarter home sales revenues increased by 6% due to a higher number of homes closed and an increase in average closing price. Net sales orders also increased, but the cancellation rate was higher than the previous year. The company is using incentives to address affordability and expects them to remain at current levels. Gross profit margin on home sales revenues improved from the previous quarter, but incentives are still elevated. The company expects similar gross margin for the fourth quarter and future margins will depend on market conditions and demand.

In the third quarter, home building SG&A expenses increased by 12%, primarily due to the expansion of operations and increased community count. The company plans to maintain a sufficient start pace and homes in inventory to meet demand while improving capital efficiency. Construction cycle times improved slightly and the company has a strong and flexible lot portfolio. Third quarter home building investments totaled $2.5 billion.

In the third quarter, the company invested $1.4 billion in finished lots, $750 million in land development, and $340 million in land acquisition. Their rental operations generated $64 million in pre-tax income and they expect their rental inventory to remain steady in the coming quarters. Their majority-owned residential lot development company, 4 Star, reported $318 million in revenues and has a strong balance sheet and lot supply. The company believes their strategic relationship with 4 Star will help them capitalize on the shortage of finished lots in the home building industry.

During the third quarter, Michael Murray reports that the financial services division of the company earned $91 million in pre-tax income with a profit margin of 37.7%. The mortgage company handled financing for 78% of home buyers, with the majority of loans being FHA and VA. The average FICO score for borrowers was 725 and first-time home buyers made up 57% of closings. Bill Wheat discusses the company's balanced capital approach and strong balance sheet, with $5.8 billion in liquidity and plans to maintain leverage around 20%. The company also had a return on equity of 21.5% and paid cash dividends of $0.30 per share.

The company has declared a quarterly dividend and repurchased shares of common stock. They have a strong financial position and have approved a new share repurchase authorization. For the fourth quarter, they expect to generate revenues of $10 billion to $10.4 billion and close 24,000 to 24,500 homes. They also anticipate a financial services pre-tax profit margin of 35% and plan to repurchase $1.8 billion of common stock for the full year. They will provide guidance for fiscal 2025 in October and expect to increase their market share next year.

The company expects increased cash flow in fiscal 2025, which will be used for share repurchases and dividends. They credit their success to their experienced teams, market share, and affordable products. They plan to maintain a disciplined approach to capital allocation and thank their employees, partners, and agents. The first question during the Q&A session was about the recent absorptions and margins, with the company possibly prioritizing profitability over sales pace. The company expects a decline in absorptions in the fourth quarter and is considering seasonality in their plans.

The company is focused on balancing price and pace to drive returns in each community. They experienced fluctuations in demand due to changes in interest rates, but maintained incentives without leaning too heavily on them. The Southeast region, which includes Florida and Texas, had slightly lower orders due to an increase in existing home inventory. However, the company still feels confident in their competitive advantage and ability to attract buyers with their pricing and incentives.

The speaker expresses condolences for a loss and then discusses sales and closings in the industry. He mentions that traffic patterns have been impacted by volatile interest rates and that people are looking for interest rate certainty when buying a home. This has led to a high level of homes being sold and closed in the same quarter. The company is focused on driving closings through starting new projects. The speaker also mentions the goal of getting cash in and out of land deals within 24 months, but acknowledges that entitlements and lot development times may make this more difficult in the future.

Stephen Kim asked about the cash flow commentary during the earnings call and was encouraged by the company's plans to increase free cash flow in the upcoming year. The company expects to use this cash flow for repurchases and dividends, and typically their guidance has been focused on home building cash flow with rental and 4 Star being offsets. Overall, their consolidated free cash flow is lower than their home building cash flow.

The speaker clarifies that the company's future cash flow guidance will be based on a consolidated basis, with rental inventory stabilizing and home building cash flow improving. The efficiency of the home building operation is expected to continue improving, leading to an increase in consolidated cash flow next year. This will result in a higher level of share repurchases and dividends being paid out of the cash flow.

The speaker responds to a question about the company's levels of spec inventory and backlog turns. They mention that there is no global expectation for the number of specs, as the business is run community by community. They also state that they are comfortable with their current position and have the ability to adjust quickly to market conditions. The speaker also mentions that buyers are looking for certainty of close and they are comfortable with their completed spec position.

The company is experiencing improved backlog conversion rates and is focused on turning houses quickly rather than having excess supply. They have seen some choppiness in the market due to fluctuating interest rates, but are managing incentives and balancing affordability concerns.

The company is experiencing higher lot costs, leading to a relatively flat gross margin for the fourth quarter. They have reduced prices and sizes of homes in some areas to meet affordability targets and are adjusting prices on a community level based on market demand and inventory conditions.

The speaker is confident in the decisions made by their teams regarding pricing changes in various communities. They do not focus on the overall numbers of price increases or decreases, but rather on turning their housing inventory and driving returns in each community. The number of finished spec homes has increased, but this is due to improved cycle times and does not necessarily indicate a slowdown in demand. The focus is on how long these homes sit on the market, as this is a better indicator of market demand.

The company is focused on maintaining the necessary housing inventory levels in each community and will adjust their starts according to demand. They are comfortable with their current inventory and do not have a buildup of aged inventory. Stick and brick costs have decreased due to lumber price decreases, but there may be some pressing for increases in other areas. The ultimate margin in the fourth quarter will depend on concession levels and closings.

The speaker discusses the company's comfort with the flat margin environment between Q3 and Q4, and shares their condolences for the passing of a colleague. They address concerns about the credit quality of consumers and state that their cancellation rate is low and their buyers have a strong FICO score and high household income.

In the current market, buyers must have a higher income to qualify for purchases, but there has been no noticeable decline in credit metrics. The company plans to increase repurchases and dividends in the future, but no specific targets have been announced yet. The amount of repurchases will depend on cash flow and share price.

The speaker is discussing the impact of the reduction in share count and expects it to be greater next year. The next question is about the choppiness in demand and the influence of rate buy-downs on consumers. The speaker explains that there was a slight increase in buyers using the permanent rate buy-down, which was up from the previous quarter and significantly from a year ago. The noise in the marketplace due to fluctuating interest rates affects buyer behavior and can depress traffic.

Eric Bosshard asks Paul Romanowski about the Florida market and its impact on traffic and price sensitivity. Romanowski explains that Florida has been an important and successful market, but affordability is a challenge due to rising prices and interest rates. He also mentions that the company is focused on providing affordable homes to reach more buyers. Sam Reid then asks about the company's rental business and potential competition from other builders. He also asks about the possibility of recapitalizing the segment with third party capital.

The speaker discusses the company's approach to capital structure and how they have become more efficient with their capital in the single family for rent market. They also mention the strong demand and under supply in this market. The speaker then switches gears to community count, which has been strong throughout 2024 and is expected to continue growing, potentially at a slower rate. The company believes that their position of strength will allow them to continue consolidating market share even with sub 10% growth. They also mention that their growth will likely come more from community count rather than increased absorption in the future.

The company has expanded into new markets and is working on opening new locations. They expect their community count to continue increasing, but at a slower rate. Lot costs have been increasing and are expected to remain a headwind for the company.

In the paragraph, Jessica Hansen and Michael Murray discuss the decline in lot costs for D.R. Horton. They mention that on a per square foot basis, there was a 2.5% increase sequentially and a low double digit percentage increase year-over-year. They also mention that the South Central and Southeast regions make up a lower percentage of closings, resulting in lower lot costs. They also discuss the company's lot developers pipeline, which consists of experienced land development companies that have had to seek alternative sources of capital. Finally, they mention that 64% of the company's closings this quarter were on lots developed by someone else besides D.R. Horton.

The speaker, Paul Romanowski, responds to a question about the company's plans for 4 Star, a subsidiary that is separately capitalized and able to support its own growth. The focus is on working with 4 Star as they continue to expand and raise capital, and at a more mature stage, the company will determine what to do with their investment. The current inventory balance for rental operations is about one-third single-family and two-thirds multifamily.

The speaker discusses the recent improvement in cycle times, attributing it to the resolution of supply chain issues and the availability of labor. They also mention that this has led to a decrease in cycle times below historical norms.

The company is focused on being more efficient in their construction process and prefers small tuck-in acquisitions for expansion. They have seen a good flow of deals but are selective in what they are willing to do. There has been no change in strategy and they are still targeting market share gains for 2025. There has been no shift in strategy despite a decrease in starts and an increase in census single family starts. The company plans to maintain their pace and continue with their market share goals.

The company is experiencing efficiencies in their operations, resulting in a lower start pace than expected. They anticipate an increase in overall starts pace to meet growth goals, but will manage inventory based on community and availability of lots. Gross margin guidance for the fourth quarter is expected to be flat due to factors such as price, incentives, and cost reductions. There may also be some price and incentive cost increases to offset the rise in lot costs.

During the conference call, Paul Romanowski addressed a question about the company's decision not to offer more incentives during the quarter due to rate volatility. He explained that the decision was made at a community level and resulted in a solid margin and seasonal sales pace. He also mentioned that the rental business is included in the company's consolidated revenue guide, but there may be some uncertainty in timing of closings. Paul ended the call with his closing remarks.

The speaker thanks everyone for their time on the call and looks forward to sharing fourth quarter results in October. They congratulate the D.R. Horton family on a successful third quarter and express appreciation for their work. The operator then concludes the call.

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