Greetings. And welcome to the Second Quarter 2019 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Please go ahead, Jessica.

Thank you, Kevin, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2019. Before we get started, today’s call may include comments that constitute 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’s 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 any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton’s annual report on Form 10-K and most recent quarterly report on Form 10-Q, both of which are 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 early next week. After this call, we will post an investor presentation and supplementary data to our Investor Relations site on the Presentation section under News & Events for your reference. The supplementary data relates to our homebuilding return on inventory, home sales gross margin, changes in active selling communities, product mix and our mortgage operations. Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning. In addition to Jessica, I am pleased to be joined by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team delivered a solid second quarter of 2019. Our consolidated revenues increased 9% to $4.1 billion, pre-tax income was $463 million and our pre-tax profit margin was 11.2%. The spring selling season is going well, as our net sales orders increased 52% sequentially and 6% from the prior year quarter. These results reflect the strength of our operational teams, our ability to leverage D.R. Horton’s scale across our broad geographic footprint and our product positioning to offer affordable homes across multiple brands. As we have discussed on our last two calls, affordability concerns have caused some moderation in demand for homes since late 2018, particularly at higher price points. However, this spring we have continued to see a good demand and a limited supply of homes at affordable prices across our markets, while economic fundamentals and financing availability remains solid. We are pleased with our product positioning and our people sales trends to-date. Our strategic focus is to continue consolidating market share while growing our revenues and profits, generating strong annual cash flows and returns and maintaining a flexible financial position, with a conservative balance sheet that includes an ample supply of homes, lots and land to support growth, we are well-positioned for the remainder of 2019 and future years. Mike?

Net income attributable to D.R. Horton for the second quarter of both fiscal 2019 and fiscal 2018 was $351 million. Net income per diluted share in the second quarter of fiscal 2019 was $0.93, up from $0.91 last year due to our lower share count this year. Our consolidated pre-tax income for the quarter was $463 million and our homebuilding pre-tax income was $400 million. Our second quarter home sales revenues increased 8% to $4 billion on 13,480 homes closed, up from $3.7 billion on 12,281 homes closed in the prior year. Our average closing price for the quarter was $295,300, down 1% from the prior year due to product mix and the average size of our homes closed was down 3%, both reflecting our ongoing efforts to keep our homes affordable. Bill?

Net sales orders in the second quarter increased 6% to 16,805 homes and the value of those orders was $4.9 billion, up from $4.7 billion in the prior year. Our average number of active selling communities increased 8% from the prior year and 4% sequentially. Excluding the builders we acquired earlier this year, our second quarter net sales orders increased 3% and our average number of active selling communities increased 2% year-over-year and 1% sequentially. Our average sales price on net sales orders in the second quarter was $294,100, down 2% from the prior year. The cancelation rate for the second quarter was 19%, consistent with the same quarter last year. Jessica?

Our gross profit margin on home sales revenue in the second quarter was 19.3%, down 150 basis points from the second quarter last year and down 70 basis points sequentially from the December quarter. This sequential decrease in gross margin was in line with our expectations and was due to cost increases, less pricing power and higher incentives. Based on today’s market conditions and expected cost moderation, we currently expect our home sales gross margin to be flat or increase slightly sequentially in the third quarter, subject to possible fluctuations due to product and geographic mix, as well as the relative impact of warranty, litigation and purchase accounting. Bill?

In the second quarter, homebuilding SG&A expense as a percentage of revenues was 9% compared to 8.8% in the prior-year quarter. The increase in our homebuilding SG&A percentage from the prior-year was mainly from higher employee costs due in part to compensation accruals related to increases in our stock price and the public equity markets this quarter. Year-to-date, homebuilding SG&A expense was 9.2% of revenues compared to 9.1% last year. We remain focused on managing our SG&A efficiently while ensuring that our infrastructure adequately supports our opportunities to increase market share over the long-term. Mike?

We ended the second quarter with 32,100 homes in inventory excluding models. 17,800 of our homes were unsold with 12,500 in various stages of construction, and 5,300 completed. Our current inventory of homes puts us in a solid position to achieve fiscal 2019 closings guidance we provided in our press release this morning. We manage our home starts at a community level and we adjust our starts if necessary to align inventory levels with current sales pace in each community. Our homebuilding investments in lots, land and development during the second quarter totaled $740 million of which $340 million was for land and finished lots and $400 million was for land development. Our underwriting criteria and operational expectations for new communities remain consistent at a minimum 20% annual pre-tax return on inventory and a return of our initial cash development within 24 months. David?

We increased the portion of our land and lot pipeline that we control through land purchase contracts again this quarter. At March 31st, our homebuilding lot position consisted of 316,400 lots of which 120,900 or 38% were owned and 195,500 or 62% were controlled. 35,000 of our total owned lots are finished and 103,000 of our controlled lots are or will be finished when we purchase them. We plan to continue to increase our lot position, being developed by third parties, by supporting the expansion of Forestar’s national lot manufacturing platform and continuing to expand our relationship with lot developers across the country. Our lot portfolio with an ample supply of lots for homes at affordable price points is a strong competitive advantage. Jessica?

Financial Services pre-tax income in the second quarter increased 8% to $34 million from $31.4 million in the prior year. Financial services pre-tax profit margin for the quarter was 33.5% up from 33.1% in the prior year. 98% of our mortgage companies loan originations during quarter related to homes closed by our homebuilding operations and our mortgage company handled the financing for 56% of D.R. Horton homebuyers. FHA and VA loans accounted for 45% of the mortgage company volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 719 and an average loan-to-value ratio of 88%. First-time homebuyers represented 53% of the closings handled by our mortgage company, up from 45% in the prior year, reflecting our continued focus on offering affordable homes for entry-level buyers. Mike?

Forestar, our majority-owned subsidiary, is a publicly-traded residential lot manufacturer now operating in 41 markets across 17 states. At March 31st, Forestar owned and controlled approximately 31,400 lots, of which 3,600 are finished, 21,700 of Forestar’s lots are under contract with D.R. Horton or subject to right of first offer under the master Supply Agreement between our two companies. Forestar’s revenues in the second quarter increased 189% to $65.4 million over the prior year quarter and pre-tax income increased 257% to $16.4 million. During the six months ended March 31st, Forestar delivered 1,066 lots and is still on track to grow its fiscal 2019 deliveries to 4,000 lots, generating $300 million to $350 million of revenue in its fiscal 2020 deliveries to approximately 10,000 lots, generating $700 million to $800 million of revenue. Forestar is a profitable business today and we expect Forestar to remain profitable throughout a significant growth period, with expected pre-tax margins of approximately 10% by fiscal 2021. These expectations are Forestar’s stand-alone results. Forestar is making steady progress in building its operational platform and capital structure to support a significant growth plans. Forestar’s liquidity, capital base and lot position at March 31st are sufficient to support its fiscal 2019 and 2020 planned growth and lot deliveries and revenues. To support investments for revenue growth in 2021 and beyond, earlier this month, Forestar issued $350 million of 8% senior notes due in 2024. Subject to market conditions, Forestar expects to opportunistically access the equity and debt capital markets if necessary to provide additional capital for long-term growth, while managing their balance sheet at a net leverage ratio of 40% or less. Forestar will host an updated presentation to the Events and Presentation section of their Investor site at investor.forestar.com at the conclusion of this call. This presentation describes Forestar’s unique lot manufacturing business model and its significant growth and value creation opportunity. We encourage investors to review it. David?

DHI Communities is our multi-family rental company focused on suburban garden-style apartments and currently operates primarily in Texas, Arizona and Florida. DHI Communities has four projects under active construction and two projects that were substantially complete at the end of the quarter. During the quarter, DHI Communities sold its first apartment project of 432 units located in McKinney, Texas for $73.4 million and recognized a gain on sale of $29.3 million. DHI Communities total assets were $170 million at March 31st and it is reported as part of other business in our second financials. Bill?

At March 31st, our $1 billion of homebuilding liquidity was comprised of $557 million of unrestricted homebuilding cash and $447 million of available capacity on our revolving credit facility. Our homebuilding leverage ratio improved 130 basis points from a year ago to 22.9%. During quarter, we repaid $500 million of senior notes at their maturity and the balance of our homebuilding public notes outstanding at the end of the quarter was $1.9 billion. We have $500 million of senior note maturities due in the next 12 months. During quarter we paid cash dividends of $56 million. We also repurchased 2 million shares of common stock for $75.6 million bringing our total repurchases for the first half of the year to 6.1 million shares and $216.2 million. Our remaining stock repurchase authorization at quarter end was $159.3 million. At March 31st, our stockholder’s equity was $9.4 billion and book value per share was $25.09, up 16% from a year ago. David?

Our balanced capital approach focuses on being flexible, opportunistic and disciplined. Our balance sheet’s strength, earnings, and annual cash flow generation are increasing our flexibility and we plan to utilize our strong position to enhance the long-term value of the company. Our continued top cash flow priorities are to consolidate market share by investing in our homebuilding business and strategic acquisitions, reduce homebuilding leverage and return capital to our shareholders through dividends and share repurchases. Jessica?

Looking forward and as outlined in our press release this morning, we are providing our current expectations for the full year of fiscal 2019 based on today’s market conditions and our results for the first half of the year. We currently expect to generate consolidated revenues of between $16.7 billion and $17 billion and to close approximately 55,000 to 56,000 homes. We are forecasting a full year fiscal 2019 income tax rate of approximately 24.5%. We continue to expect to generate homebuilding cash flow from operations of at least $1 billion for the full fiscal year and we expect our outstanding share count to be down slightly at the end of the year compared to the end of fiscal 2018. For the third quarter of fiscal 2019, we expect to generate consolidated revenues in a range of $4.4 billion to $4.6 billion and to close approximately 14,500 to 15,000 homes during the quarter. We expect our home sales gross margin in the third quarter to be in the range of 19.3% to 19.8% and our homebuilding SG&A in the third quarter to be approximately 8.2% to 8.3%. David?

In closing, our results reflect the strength of our long-tenured and well-established operating platform across the country. We are striving to be the leading builder in each of our markets and to expand our industry leading market share. We are focused on consolidating market share, while growing our revenues and profits, generating strong annual cash flows and returns, and maintain a flexible financial position. We are well-positioned to do so, with our conservative balance sheet, broad geographic footprint, affordable product offerings across multiple brands, attractive finished lot and land position and most importantly, our outstanding experienced team across the country. We thank the entire D.R. Horton team for their continued focus and hard work. We look forward to working together to continue growing and improving our operations. This concludes our prepared remarks. We will now host questions.

Thank you. [Operator Instructions] Our first question today is coming from Stephen East from Wells Fargo. Your line is now live.

Yeah. Thank you, and good morning, everybody. David, maybe I will start with the progression through the quarter. What you all were seeing with traffic trends with order progression and probably maybe most importantly the incentive progression through the quarter and if you can shed any light on what you are seeing in April with those.

Stephen, I’d say it was kind of a traditional seasonality. It got a little better in January, a little better in February, a little better in March. The market is û it seems pretty solid out there. It’s -- and April is pretty much as we expected. So I would tell you kind of a pleasant surprise given our first quarter, so we are happy with what we are seeing out there right now.

Okay. If you look at the incentives progression either with what you all were doing or what you think you were seeing in the market, is that also unwinding as you move through the months?

We have seen it unwinding, yes, incentives are certainly lower today than they were first quarter, and that progressively, we have been able to hit our sales targets with a little less incentive each month.

Okay. All right.

Okay.

Fair enough. And then the other thing. Go ahead?

I said pretty much as we expected. Yeah.

Okay. And then the other thing, just looking at your capital allocation moving forward, your option lots up to 62%, I know you don’t like, 60% was your target that you stood by, but we are already past that. So maybe a compound question here. One, if you can talk about how you expect that to progress and then looking at your capital allocation moving forward, you do have some debt coming due. Your net debt to total cap is probably a little bit or a whole lot higher than D.R. wants it, et cetera. How do you look at allocating your capital?

I have got to tell you, Stephen, we are kind of maintaining as much flexibility as we possibly can, in Don Horton’s world, any debt is bad debt, I can tell you this from a return base and capital priorities, some debt is not a terrible thing. Bill?

And Stephen, with respect to the option percentage, certainly, we are pleased with the progress we are making. We expect to continue to progress from here, but we are not going to put out a set target necessarily, but we do expect to continue to increase the percentage of our lots that are controlled through purchase contracts and that’s giving us more flexibility. What that sets up is the potential to increase our cash flow from operations over the next few years and with that increased cash flow that gives us more flexibility for our capital allocation. We have been able to fold in share repurchases into our allocation over the last year-and-a-half or so and pleased with the progress we have made there and expect to continue to keep that as an important part of our allocation.

All right. Thanks a lot.

Thank you. Our next question is coming from Carl Reichardt from BTIG. Your line is now live.

Thanks. Good morning, everybody.

Good morning.

I wanted to ask about Texas. So it’s been sort of a quarter of your business, 20%, 25%, I think, for a bit, and your orders were slightly down flattish there. We have seen some of your peers report better numbers out of Texas. Some of them have talked about it being effectively the best market they have got in terms of turnover. So it looks like you lost some share this quarter just going orders. So can you talk a little bit, David, about what’s happened in that particular market for you particularly over the last quarter given your strength there historically?

Carl, I can tell you Texas is a great market. We are seeing solid performance across all of our divisions. We are coming off very tough comp of second quarter last year and we are dominant market share in the four major cities, so it’s -- we are very happy with Texas. We like what our operators are doing out there. And the truth is our targeted growth in Texas is probably low-single digits to mid single-digit for the year, and we think we are well-positioned to hit that.

We have got a lot of markets across the rest of the country, Carl, where we don’t have that kind of dominant position, and that’s where a lot of our growth is coming from this year, while we maintain or continue to gradually improve our share in Texas.

Right. Okay. I appreciate that, Jessica, thank you. And then, in terms of community count, you had an increase this quarter, you are starting to grow those again. Can you give us sort of a sense as you look maybe over the next year or so how you are thinking about the expansion of outlet count ex-acquisitions, is that something we can expect to accelerate beyond just acquisitions? Thanks.

I wouldn’t say accelerate. We have markets where we are not dominant and our focus is to be in a significant, if not dominant, market position in every market. So a lot of growth opportunities. A flag in Texas typically helps at a much higher pace than flags in other markets. So it’s balanced, it’s disciplined and it’s something we are focused on continuing.

We have a great lot position that we will continue to replenish our communities, so we wouldn’t probably anticipate anything more than flat to slightly up organically going forward.

Great. Thanks Jessica. Thanks all.

Thank you. Our next question is coming from John Lovallo from Bank of America Merrill Lynch. Your line is now live.

Hey, guys. Thank you for taking my questions as well. First question is your outlook for a flat sequential gross margin at the low end of the range at least would seem to imply a fairly meaningful year-over-year step-down in core margin versus what you saw in the first quarter, despite, I guess, should be a lumber benefit for one and an improving market. Could you just help us understand some of the moving pieces there?

I think you see, John, that we are expecting some benefit from the lumber softening we saw last year as those closings come through and we start to deliver those. We have started and will continue to deliver those. But the market did take a step backwards in our first quarter and the pricing incentive levels that we are pushing off of right now are going to allow us to be a little stronger in the margin but it’s difficult to gauge the full extent of how much and when any of those concessions we gave up in the fall are going to be back and showing up in closing margins. Trying to take a measured pace to looking at margin.

Got you. And then, I guess, just more broadly speaking in terms of just the overall environment. I mean, are you guys fairly confident that things are reaccelerating at this point, I mean, would you expect growth to kind of trend higher as the year progresses here for D.R. Horton and for the industry itself?

Re-accelerating, that’s a tough question to answer today. A lot depends on interest rates. I can tell you we are very happy with the spring market so far. We are going to know a lot more as it rolls along, if it continues through May and early June, it’s going to be a great year.

We would look and see that some of the demand that was displaced in the fall will probably elongate as selling season this year in the spring and into early summer as those buyers have returned and more continue to come to the market, so it’s still a great time to buy a home.

Our annual guide for closings and for the 6% to 8% increase in closing and 4% to 6% increase in our consolidated revenues, so we are a little less pricing power this year, but we have got a great housing position to go drive outsized growth as compared to the industry.

Okay. Thanks, guys.

Thank you. Our next question is coming from Alan Ratner from Zelman & Associates. Your line is now live.

Hi, guys. Good morning. Thanks for taking my questions.

Hi, Alan.

Just on that last question on the last point, I guess, I think, if you take a step back 6% to 8% growth given how you started the year, certainly very impressive especially compared to what we have seen in the market. I know you guys have talked historically about 10% to 15% kind of where you hope to be annually, so I am just curious as the way you think about spring is unfolding you kind of put some of the softer demand in the rearview mirror. Is that still kind of the hope and the intention and kind of the thought based on what you are seeing right now in the market that you could eventually get back to that 10% to 15% annualized growth or have those plans changed for some reason?

It’s always possible. We try to be conservative, disciplined in what we say, and then do what we say we are going to do. So it depends on the market. As we get through the spring, we will take a look at it and then how this year ends up, we will take a look at next year. I can tell you, our operators all have the Horton DNA in them and they want to drive growth, so.

We are continuing to focus on returns though and so if you look at what we did experience in the late fall and as we are moving into this spring, there’s a balance between price and pace and we are striking that on an individual community level to drive the best possible return. And in today’s market, that may mean that 6% to 8% growth rate rather than the 10% to 15% rate to continue to maintain or improve upon our overall returns.

Got it. That’s helpful, Jessica. And then, second, you gave some stats on the mortgage business and the profitability this quarter was actually quite impressive, given some of the challenges in the mortgage space today. I was hoping you could just comment quickly on what you are seeing regarding the changes out of FHA. I know your average metrics are very favorable, but there’s a piece of your business that goes outside of the mortgage business. So has there been any fallout or any impact at all from the adjustments FHA made in March?

We have not seen material impact in the business at all. At the margin, there are certainly individual customers that may have to wait and work on a different loan program, or are getting delayed in their process, but we have not seen any significant impact whatsoever.

Got it. One final one if I could sneak it in. Jessica, I might have missed it but there was there a pre-tax margin guidance for the full year, I think you typically give that.

No. There was not. We just gave gross margin and SG&A guidance for the third quarter.

Okay. Got it. Thanks, Jessica.

We need to see the rest of the year to really guide beyond Q3 or the rest of the spring to guide beyond Q3.

We are continuing to sell and close 30% to 40% of our homes. It was actually even higher than 40% this quarter and so to get a feel for gross margin much further out than a quarter is pretty difficult.

Understood. Thanks.

Thank you. Our next question is coming from Stephen Kim from Evercore ISI. Your line is now live.

Yeah. Thanks a lot. And just a follow on there with Alan’s question on the full year profitability projection, in the past you have talked a lot about how you kind of run your business with a 20% to 22% kind of gross margin range. I am gathering from your commentary that much like the topline, historical range 10% to 15% growth isn’t necessarily the dominating factor in the way you are running your business right now, but rather returns. That similarly on the gross margin side, we could see this year be a little bit below your 20% historical range and that wouldn’t be inconsistent with how you are positioning yourself for the longer-term in a difficult market. I just want to make sure that I am hearing you correctly. And then, could you with respect to margins talk about the degree to which mix may be impacting your margin. Is it -- in other words, is Express still generating gross margins comparable to the company average or maybe a little better or just give us some sense about mix in terms of your margin makeup right now?

Yeah. In terms of the gross margin, yes, we are balancing pace and price, margin and volume, to generate the best returns we have. So, yes, those are levers that may move up and down within our range. I would say our longer-term range on margin has been 19% to 21%, or a little bit broader 18% to 22%. And so margin in the 19% is certainly not unusual for us and in the current market coming off the incentive levels that we had to put in place to regain momentum back in Q1, we feel good about the level that we are at and the ability to potentially start to carve some margin back going forward. In terms of the gross margin profile across our brands, we are still seeing pretty tight range in terms of margin and still seeing very good margins within our Express brand and that’s still the heart of the market, where we are seeing strongest demand and the lowest supply of inventory in the marketplace, so still seeing very solid margins in Express.

Great. That’s very helpful. And then with respect to M&A, I think, you talked about maintaining a balance and disciplined approach. Recently we have seen a couple of what I would basically call asset purchases in local markets, Pulte just announced the American West and then Lennar, we understand bought level homes in Raleigh. And so, I guess, I am wondering, do you see the competition for local deals meet midsize sort of private names in local markets. Do you see that competition intensifying in the current environment, and if not, or I should say in a situation where that is actually happening, can you talk about how D.R. Horton is positioned or prepared to approach those kinds of opportunities. Do you think that this is something that you would, for instance, at this point, favor share repurchases just because of an intensifying competitive environment for M&A?

I would say, Stephen, that we look at the M&A as opportunities to add to the long-term profitability and capabilities of the D.R. Horton company overall. So where we can expand with great teams into new markets or deepening share in existing markets with great teams of people. That’s our primary focus and we are frankly very selective on where we are going to get aggressive and any kind of a acquisition opportunity. Having said that, we need to continue to look at lots of opportunities and acquisitions, and we certainly think that DHI is an attractive acquisition opportunity as well for us in terms of our share buyback. You can see that as we have allocated more capital to that this fiscal year than in prior, so it’s a balanced approach.

Yeah. So you are kind of drawing a distinction between the way you would approach M&A in other words, being basically your personnel-oriented and talent-oriented as opposed to what we have seen from, let’s say, Pulte most recently in terms of primarily being asset acquisitions, right?

It certainly is as a component of the overall acquisition, but the determining factor for us is generally going to be the people and the talent rather than simply the lot position or the lot portfolio. That is what justifies for us the effort, expense, and potential risk you have with an acquisition is the long-term playback of adding to your platform.

Great. Thanks very much, guys.

Thank you.

Thank you. Our next question is coming from Michael Rehaut from JPMorgan. Your line is now live.

Thanks. Good morning, everyone. First question I had was just kind of the pace that you have seen over the last two months or three months, perhaps, relative to your expectations, so far as some of the other builders have reported, they have pointed to not just seasonal improvement, but a little bit of improved year-over-year trends. In other words, the year-over-year growth improving as well from January to February and to March, maybe not every month, but certainly towards the end of the quarter, and perhaps even into April. So I was curious if you could give us a sense if that year-over-year growth accelerated as well particularly on a sales pace basis. And when you talk to similarly incentives improving sequentially, obviously, they are still up year-over-year, I was wondering if that year-over-year delta on incentives perhaps has moderated as well.

Mike, we generally don’t comment on individual months within a quarter in terms of the year-over-year improvement. As David said, we are very pleased with our sales pace. We did see normal seasonality as we move throughout the quarter from month to month to month, and incentives for us are always on a community-by-community basis. So we have got communities where we have been able to roll those back fully from what we have had to do in the fall and we have got some that still have some elevated incentives out there. But as we continue to move throughout the spring, we are hopeful that we can continue to dial those back in communities, where maybe we haven’t been able to fully yet.

I would say we are not seeing anything outside of normal seasonality. It’s been a good spring. It’s been a solid spring. But we would say it’s consistent with what we would expect to see in normal seasonality thus far.

Okay. So unless I am interpreting that differently, it seems like perhaps again on a year-over-year trend basis, again, I know you kind of punted on the month-to-month, but it does, it sounds like normal seasonality means that, again, unless I am reading the tea leaves of your answer a little too finally that, perhaps, it was more steady it sounds like rather than improvement. I guess, second question maybe just to zone in on a region here. Appreciate the color commentary on Texas. Another big focal point has been California, and in particular, some of the real improvements month-to-month over the last two months or three months, 4Q was pretty rough. Just wanted to get a sense again if there’s been anything outside of normal seasonality or would you say that by contract anything a little bit more from an acceleration standpoint?

I spent the last four to six weeks traveling our California market, driving communities, very impressed with the effort execution of our teams out there. I don’t think our California market is on fire by any stretch of the imagination. But I will say in my world, effort and execution is what separates us from our competitors and I was very happy with what I saw from our people. The overall market in California appears to be getting a little better. It was not good in the first quarter and there’s some portions of it that had -- gives you a sense that it is coming back fairly well. We are focusing as affordable as you can be in California. I was very happy with what I saw, I will say that.

And, Mike, when we post our supplemental data after the call, you will see we have been talking a lot about in the west part of our issue had just been getting the communities online and this is the first quarter in several quarters our west region community count on average is up 5% year-over-year and it’s even up 4% sequentially. So we are getting those new communities online and we are very excited about the product that we are bringing to market.

And I think you will see those new communities contribute more meaningful in Q3 and Q4 to sales than in the first month û the first quarter of their opening.

Great. Thanks very much. See you in a few weeks.

Thanks.

Thank you. Our next question is coming from Ken Zener from KeyBanc Capital Markets. Your line is now live.

Good morning, everybody.

Good morning.

Hi, Ken.

So could you just start with your spec completed number?

It’s 5,300.

Okay. And I apologize, just kind of going through calls this morning. But you gave guidance for 14,500 to 15,000, is that correct for 3Q?

That’s correct.

That’s right.

Yeah.

So let me ask you this question. If you look at your units in inventory, it appears that your conversion rate of closing is decelerating versus kind of the past, which would imply and that’s been happening in recent quarters, so it’s one of two things, obviously, there’s fair demand or your inventory on average is just a little bit younger. Is it because your -- why is that, is it because you are building more specs and you just tend to have more younger inventory versus something that was more backlog-ish and what exactly was the intra-quarter order of closings, please?

Intra-quarter closings would be those that we sold and closed in the same quarter. I believe it was over 40%...

Yes.

…in the second quarter. Looking at the age of our inventory, the number of unsold homes that we have in inventory completed over six months was the same at March 31, 2019 as it was at March 31, 2018. So the inventory is still young, to use your word. And looking at that, we did have some I don’t want to use the W word, but we did have some events this quarter that effected some production. So we do have some of those completions coming a little bit later, from the winter and into the early spring.

Yeah. How -- okay. Let me look at this another way. I mean, obviously, you guys are issuing guidance, because the last six months are pretty much already growing vertical. How do you think about your spec position as it relates to backlog? So, obviously, you want to achieve even flow, which you do that by reducing your December quarter units in inventory as much as you did historically and others do which helps you with market share. But how do you think about how you are running spec versus what you are seeing in terms of orders. I mean, you always going to keep basically your units under construction at a 2:1 ratio backlog? Is that your approach in general or how should we think about how that spec will turn relative to the lower industry growth rate that we are seeing?

Generally, we look at a snapshot of inventory position of around 50% of sold to unsold homes in total inventory that will vary higher and lower at different points in the year. But -- and that’s sort of a result of every one of our operating divisions evaluating their communities one by one, looking at a trailing sales pace along with an expected forward sales pace based upon where they are in the year and what they are seeing in those sub-markets. And then they are adjusting their spec inventory kind of relative to the construction cycle of that community and managing it week-to-week-to-week based on sales, closing and production completions. And there are varying starts on that basis, so the sum result of it comes up to about a 50% ratio plus or minus throughout the year.

Thank you.

Thank you. So 2:1 is a good ratio.

Thank you. Our next question is coming from Matthew Bouley from Barclays. Your line is now live.

Hi. Thank you for taking my questions. I wanted to ask about the closing guidance. I think 3% to 6% in the third quarter and it seems that the full year guide suggests some acceleration of that growth in the fourth quarter. So, I mean, is that third quarter guide, I guess, the 3% to 6%, is that a fair reflection for how you are seeing, I guess, the sales environment today, obviously, as you just mentioned, 40% orders and closings in the same quarter. And then, what kind of gives you confidence in that acceleration in the fourth quarter, is it really just the timing of your spec completions or I guess what else can you say there? Thank you.

I think, yes, we touched on for spec completions, as well as a bit of an elongated demand cycle this spring is what got displaced from the market in the fall. Still the same people that want to live in a home from the fall. Still want to live in a home. They still have a housing need, and we are positioned to supply that need this summer.

Okay. Thank you for that. And then just on the purchase accounting. Can you û do you have the numbers for what that was in the second quarter and then how that will trend into the third and fourth quarters?

Sure. So, Matthew, we saw actually 20 basis points of impact in our March quarter. Honestly, probably a little bit lighter than we would have expected. We did û not that we like to talk about weather, but some of our acquisitions are in markets that do experience a little bit more extreme weather than a lot of the markets we already operated in. So a little bit of that purchase accounting impact has been delayed really until this quarter, Q3 and into Q4. So wouldn’t be surprised if that 20 basis points of impact in March ticks up in June.

Okay. That’s helpful. Thanks again.

Thank you. Our next question is coming from Nishu Sood from Deutsche Bank. Your line is now live.

Thank you. Just wanted to ask about the DHI Communities, appreciate the incremental details on that. Now that part of your business seems to be maturing, just wondering if you could give us some kind of broad brush strokes on how you expect that to grow, how big a part of the business it can become, what regions of the country you might ultimately expect it to be and then whether it would kind of stick to the garden style apartments or whether it might broaden in terms of product lines. Just wanted to kind of get whatever longer-term visions you can provide right now?

We are, I think, very happy with the progress to-date, building out a team, identifying sites. The whole key for us is sustainable and scalable. So it’s going to play very closely in with our homebuilding operations. The sites that we are building on right now are pieces of property that were a part of our larger communities where we are building houses. It seems very synergistic to what we are trying to accomplish. It allows us to reach affordability of buyers or not buyers, but homeowners, future homeowners, it gives them -- we start a relationship with them, so we are very excited about it. I think right now, we have four projects under construction. Two pretty much completed and were in lease-up and a pipeline of deals across the country of more than 20. So, over time, it’s going to be a pretty significant business for us.

Got it. Thanks.

And from some very early-stage projects to more robust further down the line. We still expect the next couple of years, we are not going to see a sale of recorder, but there will be occasional sales as we deliver the first set of projects that have been in the pipeline the last couple of years, but then over the longer term certainly expect some growth there.

Got it. Thanks. So coming back to the annual guidance, I know there’s been a lot of questions about it and it’s been a very difficult environment over the past six months to nine months to even think about what ‘19 might have looked like. Investors generally looking at the market, rates have fallen, the outlook for the year, obviously, from what builders have been saying has improved. And so just wanted to dig into how are you reflecting that in your guidance that you have given? I mean, if you look at the volume guidance, for example, acquisitions are a big part of it and gross margins you are expecting some modest improvement. So -- and of course we appreciate your more kind of level approach to giving guidance through these periods of volatility, but how should we think about how your guidance is reflecting improvement in demand that the market has seen in recent months, should we think about their potentially being more upside against your guidance or it’s a de-risk to guidance or how should we think about that?

I would tell you the first thing I would take away is we feel good enough to give guidance again. So that to me is the biggest takeaway is that the spring has been good enough. We felt comfortable to sit here today and provide that level of guidance. We will continue to update quarterly as we can, but with six months left in the year, the houses we have under construction, the spring sales we have seen to-date. As -- we don’t want to put guidance out there, we don’t feel comfortable that we can hit, but I’d tell you that we think the 55,000 to 56,000 annual homes is a very realistic range at what we would expect to deliver for this year.

Got it. Thank you.

Thank you. Our next question is coming from Buck Horne from Raymond James. Your line is now live.

Hey. Thanks. Good morning. I just want to follow-up on Nishu’s comment or his question about the DHI Communities, just wondering, I guess, are you considering a build to hold strategy or are these all going to be built for sale at some point and also would you consider JV partners or some other capital structure to scale that up more quickly?

Currently, we are in a kind of a build-for-sale operation. We would evaluate alternative capital structures. David mentioned before, we are looking for something that’s scalable and sustainable and that would certainly be more accretive to returns in that business. First thing for us was simplistically wanting to figure out and kind of understand the business and looking at how we can build that business as sort of a combination with our homebuilding platform across the country. So a lot of the initial pipeline that we have been working within current projects have largely been on land parcels that are part of larger master plans we have been developing and building homes in and rather than in the past typically selling off those corners of land to other developers, look to develop the capabilities to monetize that land and add that value ourselves. So as we look to roll it out forward and accelerate it, we would certainly be looking at the capitalization of that business with a lot of options open in front of us.

Okay. That’s great. That’s helpful. And on the debt that you have coming due in the next 12 months, I think, you mentioned another $500 million. Is there a plan to possibly pay that off sooner or would you wait until the maturity on that? And also just related to Forestar’s Capital Plans, how are you thinking about the market timing for their debt or equity?

In terms of the Horton Capital Plan, no plans to pay off the next maturity early, we will be then evaluating our cash flow, our investment plans for fiscal 2020 and as we put those plans together, we will determine whether we simply pay that debt off or whether we refinance all or a portion of that. In terms of Forestar Capital, very pleased with the progress that has been made with respect to building the capital stack at Forestar. Them issuing their first issuance of senior notes here in April was an important step to getting the capital to start making investments for fiscal ‘21 revenues for Forestar. Certainly equity is in the plans as well, and we want to be prepared and in position for Forestar to issue equity when the opportunity presents itself. I have been very pleased that Forestar now has three equity analysts covering them, and the management team at Forestar really alongside the Horton team here as well is starting to hold more meetings with investors. We will begin attending some investor conferences and basically getting the story out there. I would encourage investors to look at the Investor deck that’s on the Forestar website. It’s very helpful in describing the lot manufacturing business model at Forestar and certainly look forward to them being able to expand their float in the future.

And Forestar will start having a stand-alone conference call beginning in the June quarter.

Thank you.

Thank you. Our next question is coming from Jack Micenko from SIG. Your line is now live.

Hey. Good morning, guys. This is actually Soham Bhonsle on for Jack this morning, just on your gross margin guide for third quarter, I know you guys are on the lower end of 19.3, which is flat. But how do we sort of get to the higher end of 19.8? Can you just maybe talk through some of the moving parts of how we could get there?

Sure. We do have some cost tailwinds that we do expect to start coming through our closing in Q3, primarily from lumber pricings having dropped in the latter part of ‘18 and as we have talked about a bit as we have been able to pull back our incentives gradually through the spring, that should result in some improved margins versus the closing we have seen in Q2, say, those are our primary factors that we would expect to see some sequential or potential for margin improvement.

Okay. Great. And then, on sales pace, it looks like core sales pace was ex the acquisitions, was up 1% but down 2% if you were to include the acquisitions, can you just confirm that? And then, in going forward should we expect order increases to be more a function of pace improvement at this point or more of community count year-over-year?

So on your first question, our absorption kind of on the same-store basis is up 1% year-over-year and it was up 49% sequentially. So that’s kind of right in line with traditional seasonality and even ex-acquisitions and then the second question?

Just in terms of how should we think about order improvement year-over-year, is it pace-driven or community count?

Oh! Well, our community count did tick-up organically this quarter and then even further because of the acquisitions, so I’d anticipate the community count remaining up through the remainder of the year. We will see what comes from absorption versus communities, but we haven’t given a specific guide to sales.

Okay. Thank you.

Thank you. Our next question is coming from Susan Maklari from Credit Suisse. Your line is now live.

Thank you. Good morning.

Good morning.

My first question is just can you talk a little bit to what you have seen across your various brands? You have got such a range in there with Freedom, Express, Emerald. Can you just talk to maybe some of the differences that you have seen and especially maybe as things have improved as we have moved through the quarter?

We are very happy with the performance of all the brands. I mean, we are growing Freedom. I think that’s going to be a very important part of our future offerings. Emerald has stayed fairly steady at about 3% of our deliveries. The Horton brand maintains dominance and Express, it’s pretty much fully rolled out, so I think that 30, 35 may go up a little bit, percent of deliveries will remain constant.

Okay. And then can you just talk to any updated expectations as it relates to input cost. You have talked in the past about lumber coming off and how that could provide some offset within the gross margins to some of the pressures that are there. Has anything changed in there or anything that we should sort of be thinking about in the back half?

No. Su, I mean, we do expect that cost moderation to primarily come from lumber as it pertains to other material inputs. We have always got some costs that are rising, but we generally find ways to offset those so we would expect lumber to be a tailwind to gross margin in the back half of the year. Labor costs haven’t come down, even with some of the softness. But in terms of trade availability, that’s helped a little bit as some builders have slowed their starts this spring as compared to maybe what was anticipated. I don’t think we have given our revenue and stick-and-brick per square foot yet that we typically provide on the call, so on a year-over-year basis our revenues per square foot were up about 2% versus our stick-and-brick costs which were up 4%, so that goes right in line with the year-over-year decline in gross margin we saw. Sequentially that was a much tighter range. Our revenue per square foot was essentially flat and our stick-and-brick cost per square foot was just very, very slightly up.

Okay. Thank you for the color.

Thank you. Our final question today is coming from Alex Barron from Housing Research Center. Your line is now live.

Thanks. I wanted to ask along the lines of the multi-family rental business, whether you guys have given any thought or have started any plans to build out single-family rental communities for sale.

Something we are always looking at opportunities, Alex, and as we get further into that, if we get further into that, we will certainly let you know.

Okay. [Inaudible]

If the question is have we given it any thought, absolutely, w watch everything going on in the industry.

One last one if I can ask on the other one, the multi-family, I don’t know if you guys if I missed it or did you guys give any specific guidance. Can we expect another of those communities to be sort of report another gain next quarter or not necessarily?

We have not given specific guidance, Alex. We are still in the early stage. This was the first project sale in the multi-family division. We do have four projects under construction and two projects that are substantially completed in the lease-up phase. So we sort of would expect we would have two projects in the coming quarters. But we don’t expect to see a sale every quarter. So we are not in a position yet to provide more specific guidance than that.

Got it. Okay. Thanks so much. Take care.

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Thank you, Kevin. We appreciate everyone’s time on the call today and look forward to speaking to you again in July to share the third quarter results and to the D.R. Horton team, incredibly proud of what you guys have accomplished out there over the last six months. I just want to thank you.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.