Good morning. And welcome to the D.R. Horton, America’s Builder, the largest builder in the United States Fourth Quarter 2020 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will call the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you. You may begin.

Thank you, Paul, and good morning. Welcome to our call to discuss our fourth quarter fiscal 2020 financial results. 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 is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake 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 subsequent reports on Form 10-Q, all of which are or will be 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-K towards the end of next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica. And good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. D.R. Horton team faced the year with a strong fourth quarter, which included an 81% increase in net sales orders to 23,726 homes and a 60% increase in consolidated pretax income of $1.1 billion and a 27% increase in revenues to $6.4 billion. Our pretax profit margin for the quarter improved 340 basis points to 16.5%, and our earnings per diluted share increased 66% to $2.24. For the year, consolidated pretax income increased 40% to $3 billion on $20.3 billion of revenues. Our pretax profit margin for the year improved 260 basis points to 14.7%, and our earnings per diluted share increased 49% to $6.41. We closed a record 65,388 homes this year, an increase of over 8,400 homes or 15% from last year. Our homebuilding return on inventory was 24.6%, and our return on equity was 22.1%. These results reflect the strength of our homebuilding and financial service teams, our ability to leverage D.R. Horton's scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands. Our homebuilding cash flow from operations of 2020 was $1.9 billion. Over the past 5 years, we have generated over $5 billion of cash flow from homebuilding operations, while growing our consolidated revenues by 88% and our earnings per share by 216%. During this time, we also more than doubled our book value and reduced our homebuilding leverage to 17.5%, while significantly increasing our returns on inventory and equity. Housing market conditions are currently very strong and our teams are focused on maximizing returns, while increasing our market share. However, we remain cautious regarding the impact of the COVID-19 pandemic and other external factors may have on the economy and our operations in the future. We believe our strong balance sheet, liquidity and experienced team’s position us very well to operate effectively through changing economic conditions. We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales base and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions. With 38,000 homes in inventory, an ample supply of lots and continued strong sales trends in October, we are well positioned for another great year in 2021. Mike?

Diluted earnings per share for the fourth quarter of fiscal 2020 increased 66% to $2.24 per share, and for the year, diluted earnings per share increased 49% to $6.41. Net income for the quarter increased 64% to $829 million, and for the year, net income increased 47% to $2.4 billion. Our fourth quarter and fiscal 2020 results include income tax benefits of $15.8 million and $93.4 million related to federal energy efficient homes tax credits that were retroactively reinstated earlier in the year. Our fourth quarter home sales revenues increased 28% and to $6.1 billion on 20, 248 homes closed, up from $4.8 billion on 16,024 homes closed in the prior year. Our average closing price for the quarter was $302,600, up slightly from last year, while the average size of our homes closed was down 3%, reflecting our ongoing efforts to keep our homes affordable. Bill?

Net sales orders in the fourth quarter increased 81% to 23,726 homes, and the value of those orders was $7.3 billion, up 84% from $4 billion in the prior year. We sold 10,596 more homes this quarter than the same quarter last year. This positions D.R. Horton to achieve further gains in market share and scale as we deliver during fiscal 2021. Our average number of active selling communities increased 3% from the prior year and was up 2% sequentially. Our average sales price on net sales orders in the fourth quarter was $307,600, up 2% from the prior year. The cancellation rate for the fourth quarter was 19%, down from 23% in the prior year quarter. We believe the increase in demand in the second half of our fiscal year was fueled by increased buyer urgency due to lower interest rates, a limited supply of homes at affordable price points and, to some extent, pent-up demand from the pandemic slowdown earlier this year. We were and remain well positioned for this increased demand with our affordable product offerings, lot supply and housing inventories. We continued to see strong increases in net sales orders of greater than 50% in October compared to the same month last year. Jessica?

Our gross profit margin on home sales revenue in the fourth quarter was 22.7%, up 110 basis points sequentially from the June quarter and up 170 basis points compared to the prior year quarter. The sequential increase in our gross margin from June to September exceeded our expectations and was primarily due to the strength of the overall housing market, which resulted in some pricing power and lower sales incentives. On a per square foot basis, our revenues increased approximately 4% sequentially, while our stick and brick cost per square foot increased 1.5% and our lot cost increased 6%. We remain focused on managing the pricing, incentives and sales pace relative to our lot supply and production capacity in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand. We expect both our construction and lot costs, and our home prices will increase on a basis in our homes closed next quarter. And we expect a further reduction in the average size of our homes closed. We currently expect our home sales gross margin in the first quarter, to be around 23%. Bill?

In the fourth quarter, homebuilding SG&A expense, as a percentage of revenues was 7.6%, down 90 basis points from 8.5% in the prior year quarter. For the year, homebuilding SG&A expense was 8.2%, down 50 basis points from 8.7% in 2019. Our homebuilding SG&A expense, as a percentage of revenues is at its lowest point in our history, and we remain focused on controlling our SG&A, while ensuring our infrastructure appropriately supports our business. Mike?

We ended the year with 38,000 homes in inventory. 14,900 of our total homes were unsold, of which 1,900 were completed. We also had 1,800 model homes, at the end of the year. Due to our strong sales increases in the second half of the year, especially for homes which were available for quick delivery. Our level of unsold and completed unsold homes is lower than recent years. As we mentioned on our last call, we have accelerated our pace of home starts across most of our communities to ensure we maintain an adequate number of homes available to meet demand. We made good progress to increase our homes and inventory during the fourth quarter. And we expect to increase them further, during the first quarter of fiscal 2021. At September 30th, our homebuilding lot position consisted of approximately 377,000 lots, of which, 30% were owned and 70% were controlled new purchase contracts. 30% of our total owned lots are finished and at least 50% of our controlled lots are or will be finished, when we purchase them. Our current lot portfolio continues to provide us a strong competitive position, allowing us to start construction on more homes. David?

Our fourth quarter homebuilding investment in lots, land and development totaled $1.6 billion, of which $690 million was for finished lots, $500 million was for land and $380 million was for land development, $330 million of our land and lot purchases in the fourth quarter were for Forestar. After briefly slowing our investments in lots, land and development earlier this year and the beginning weeks of the pandemic, we have since increased our pace of investment to ensure we maintain an adequate lot supply to support our strong sales and home construction pace. As a result for the year, we invested $5 billion in lots, land and development. Mike?

In October, we acquired the homebuilding operations of Braselton Homes, the largest homebuilder in Corpus Christi, Texas for $23 million in cash. The assets acquired included approximately 90 inventory homes, 95 finished lots, control of 840 additional lots new purchase contracts, and a sales order backlog of 125 homes. We welcome the Braselton team to the D.R. Horton family. Bill?

Forestar, our majority owned subsidiary, is a publicly traded residential lot manufacturer, operating in 49 markets across 21 states. Our strategic relationship with Forestar as a well capitalized lot supplier across much of our operating footprint is serving us well and is presenting opportunities for both companies to gain market share. Forestar is delivering on its high-growth expectations with revenue growth of more than 100% and net income growth of 84% in fiscal year 2020, while they continued to build out their national operating platform. At September 30th, Forestar's lot position consisted of 60,500 lots, of which 42,400 are owned and 18,100 are controlled through purchase contracts. 72% of Forestar's owned lots are already under contract with D.R. Horton or subject to a right of first offer under our master supply agreement. Forestar is separately capitalized from D.R. Horton and has approximately $740 million of liquidity, which includes $400 million of unrestricted cash and $340 million of available capacity on its revolving credit facility. At September 30, Forestar's net debt to capital ratio was 22.1%, and their next senior note maturity is in 2024. With low leverage, ample liquidity and its relationship with D.R. Horton, Forestar is in a very strong position to navigate through changing economic conditions and continue to grow their business. Jessica?

Financial services pretax income in the fourth quarter increased 100% to $121 million with a pretax profit margin of 54.9% compared to $61 million and 44.8% in the prior year quarter. For the year, financial services pretax income was $245 million on $585 million of revenue, representing a 41.9% pretax profit margin. Despite the disruption in the secondary mortgage markets earlier this year caused by COVID-19 and the uncertainty of the impact of the Cares Act, our mortgage company has continued selling the mortgages it originates at strong net gains. We began retaining servicing rights on a portion of our FHA and VA loan originations in the third quarter due to lower valuations offered by mortgage servicers. Servicing values have since improved, and we expect to sell these rights to third parties. We will continue to monitor developments in the mortgage market and adjust our operations to adapt to changes in market conditions. For the quarter, 98% of our mortgage companies were in originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 69% of our homebuyers. FHA and VA loans accounted for 50% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 719 average loan-to-value ratio of 90%. First-time homebuyers represented 58% of the closings handled by our mortgage company, up from 50% in the prior year quarter. Mike?

DHI Communities is our multi-family rental company focused on suburban garden-style apartments that had five projects under active construction and one project that was substantially complete at the end of the year. These projects represent 1,730 multifamily units, including 1,430 units under active construction and 300 completed units. DHI Communities sold two projects during the first and second quarters of fiscal 2020. In fiscal 2021, we expect to begin marketing two or three projects for sale. However, we will be flexible on the timing of these sales based on market conditions. We expect new apartment sales to occur in the first quarter. DHI Communities assets totaled $246 million at September 30. As we mentioned on our last call, we are also continuing to evaluate our opportunities in the single-family rental home market. During fiscal 2020, several of our homebuilding divisions began constructing and leasing homes as single-family rental properties. At September 30th, 2020, our homebuilding fixed assets included $87.2 million related to our single-family rental platform, representing 10 communities totaling 740 single-family rental homes in finished lots, of which 440 of these homes are complete. After each of these rental communities is constructed and achieves a stabilized level of leased occupancy, we expect to market and sell the entire community. We expect our total investment in our single and multifamily rental platforms to more than double by the end of fiscal 2021. Bill?

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During fiscal 2020, our cash provided by homebuilding operations was $1.9 billion and our cumulative cash generated from homebuilding operations for the past five years totals $5.2 billion. At September 30th, we had $4.4 billion of homebuilding liquidity, consisting of $2.6 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities. Our homebuilding leverage was 17.5% at fiscal year end, with $2.4 billion of homebuilding public notes outstanding and $400 million of senior note maturities in the next 12 months. Subsequent to year end, we issued $500 million of 1.4% homebuilding senior notes due in October 2027. We plan to continue maintaining higher homebuilding cash balances than in prior years to support the increased scale and activity in our business and to provide flexibility to adjust changing conditions and opportunities. At September 30th, our stockholders' equity was $11.8 billion, and book value per share was $32.53, up 20% from a year ago. For the year, our return on equity was 22.1%, an improvement of 490 basis points from 17.2% a year ago. During the quarter, we paid cash dividends of $63.7 million. For the year, we paid cash dividends of $256 million and repurchased 7 million shares of common stock for $360.4 million. We did not repurchase any shares during the third and fourth quarters, but we expect to resume share repurchases during fiscal 2021. Our outstanding share count is down 1% from a year ago, and we currently have an outstanding share repurchase authorization of $535 million. Based on our financial position and outlook for fiscal 2021, our Board of Directors increased our quarterly cash dividend by 14% to $0.20 per share. We currently expect to pay dividends of approximately $290 million in fiscal 2021. Jessica?

Based on today's market conditions and looking forward to the first quarter of fiscal 2021, we expect to generate consolidated revenues of $5.4 to $5.6 billion and our homes closed to be in a range between 17,500 and 18,000 homes. We expect our home sales gross margin in the first quarter to be around 23% and homebuilding SG&A in the first quarter to be approximately 8.9% of homebuilding revenues. We anticipate a financial services pretax profit margin in the first quarter of 35% to 40%, and we expect our income tax rate to be approximately 24%. Looking further out, we currently expect to generate consolidated revenues for the full fiscal year of 2021 of $24 billion to $25 billion and to close between 77,000 and 80,000 homes. We forecast an income tax rate for fiscal 2021 of approximately 24%, and we currently expect our outstanding share count at the end of fiscal 2021 to be approximately flat with the end of fiscal 2020. We expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for the level of our homebuilding cash flow in fiscal 2021 at this time as we prioritize investing in attractive return opportunities in our homebuilding business. Augmenting our housing and land and lot inventories, after much better-than-expected demand this year and potential M&A. After reinvesting in our homebuilding business, our cash flow priorities include significantly increasing our investment in both our multi and single family rental platform, maintaining our conservative homebuilding leverage and strong liquidity, paying a dividend, which was just recently increased and repurchasing shares to keep our outstanding share count flat year-over-year. David?

In closing, our results reflect the strength of our experienced teams, industry-leading market share, broad geographic footprint and affordable product offering across multiple brands. Our strong balance sheet, ample liquidity and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions, and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our company. Thank you to the entire D.R. Horton team for your focus and hard work. Your reference during 2020 have been remarkable. We are proud of your work ethic and your positive spirit as you safely continue helping our customers close on their much anticipated new homes. We closed the most homes in a year in our company's history and are incredibly well positioned to continue improving our operations in 2021. This concludes our prepared remarks. We will now host questions.

Thank you. [Operator Instructions] Thank you. Our first question comes from John Lovallo with Bank of America. Please proceed with your question.

Hey, guys. Thank you for taking my questions. The first one is, you reached 70% options even faster than we anticipated and there was a pretty nice jump from around 65.7% in the third quarter. The question is, I mean, do you expect to be able to kind of grind higher from here or was there something unique in the quarter that allowed you to step-up that option percentage?

John, I would say there isn't anything unique. It's just the continuation of hard work and focus. And yes, our expectation is we will continue to grind higher.

It's really a combination of both Forestar's growth and our increased relationships with third party developers. They're both driving that percentage higher.

And John, as we said, from quarter-to-quarter, you could see some volatility, some quarters could be up, some could be slightly down, it can bounce around a little, but the general trend will be continuing to grind higher.

Okay. That's really helpful. And then in terms of the liquidity position, you guys announced the dividend raise today and the fact that you'll buy back shares to keep the count – the share count flat and also your plans to reinvest in the business. But $2.6 billion of cash is a lot. I mean is there any reason why you wouldn't become more aggressive on buybacks?

We'll evaluate that, compared to the alternative opportunities in the business. But clearly, with the returns we're seeing in the business today and the demand that we're seeing. We have a need to reinvest in our homebuilding business significantly to put our homes and inventory at a level to meet demand, and have our position and position to meet demand as well. As we look at our cash balances, our scale and our volume and level of activity in our business, is significantly higher than it was even just 2 or 3 years ago. And so we do expect to maintain a higher cash balance going forward, than we have historically. I think you will expect to see from us, at a minimum at quarter end will always be in homebuilding cash greater than $1 billion. But I think most often, you'll see our cash balance between $1.5 billion and $2 billion. And just for a frame of reference, we feel like that's an appropriate level of cash to maintain in the homebuilding business to support our activity. Because just as a frame of reference, on a monthly basis, our cash spend for our accounts payable, for our home construction, land and land development, payroll taxes, basically, all of our cash expenses range between $1.7 billion and $2 billion every single month. So maintaining $2 billion of cash is not excessive. I really feel like it's an appropriate level for our business. And also gives us flexibility then, when we see changing market conditions or opportunities, to adjust and take advantage of those.

That's very helpful. Thanks, guys.

Thank you. Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.

Great. Thanks a lot, guys, impressive quarter, exciting times. My first question relates to production rates. And in particular, I was looking at your homes under construction, which were up 34% year-over-year, if you include model homes. And then, relative to that 17,500 to 18, 000 closings number in 1Q, which seemed a little low to me. But your, - given your backlog, I mean, I assume that they don't close in 1Q but close in 2Q. But talking about this, homes under construction up 34%, is that kind of rate 30% to 40%, let's call it, growth in homes under construction, a sustainable rate in your eyes for, let's say, the next six months? Or is that something you were able to do kind of as a first sprint, but that's not in your view, sustainable, be curious to see what you say about that?

Good morning, Steve. We anticipate, the homes we've gotten started in the fourth quarter are really going to help us deliver the backlog and deliver new spec sales in Q1 and then into Q2. But because we started so many homes in Q4, they're not as far along in the production process, as they normally would be. So they're perhaps a little younger than the average balance might have been. Plus, we just had fewer completed homes in inventory, at the end of September this year, than we did last year. So it's going to take a while to complete our homes and deliver in Q1 or Q2. I think we'll see an elevated level of homes in inventory going into the next quarter. And then we're going to monitor for what we see in spring selling conditions. And we'll adjust to meet demand. Right now, we feel really good about the outlook for the market. And see a lots in front of us and the production capabilities to continue starting homes, and delivering to the higher demand levels.

Great. So in that response, I really didn't get a sense of that the growth that we saw in the homes under construction was something that overly stretching your capacity. So I mean, you're going to gauge market conditions. But in terms of your ability to scale, I'm not getting the sense that you've sort of overstretched yourself. Correct me, if that's an incorrect translation of what you said.

Steve, it's David. Everything we do, we think about scalable, sustainable of being a major factor in the thought process. So our lot position, our forward lot position, the deals we control and have being delivered to us, best I've ever seen. The market is the best I've ever seen. But a one quarter pop and starts doesn't help. So if you can't sustain it, it really adds a little value.

Yes. And you've been really clear about that. Thanks for that.

We feel very, very good about where we are and what the market is giving us.

That's encouraging. My second question relates to gross margin. The gross margin you put up in 4Q, if I'm not mistaken, was the strongest you've seen since 2006, and it certainly seems like there's a pretty significant upward trajectory in that gross margin with a lot of momentum. You guided three months ago to a gross margin level substantially lower than what you actually did, not complaining. But I would just be curious as to what the drivers to the excess or the overage or the outperformance in the gross margin was -- and particularly, how it came in over the course of the quarter that led you to be so pleasantly surprised and us too?

It's a combination of several factors, Steve. It did exceed our expectations. When we spoke - last spoke in July, we were seeing unusual demand into the summer. But I think we still had some question as to how long it might sustain. And fortunately, for the market, we continue to see very strong demand all the way through the end of our September quarter, and of course, we commented through October. So we had certainly more pricing power throughout the quarter as we were selling through our spec inventory than we had anticipated. We also had some anticipation that we might see a bit more cost increases come through than we have thus far. Those are still coming. We see those coming in the next quarter, but we did not see as much cost increases in our stick and brick as we would have anticipated in July.

That's great. Sounds like Brad and the team are doing a good job as everybody else is, too. So thanks very much guys. Good quarter.

Thank you.

Thank you. Our next question comes from Carl Reichardt with BTIG. Please proceed with your question.

Thanks. Good morning everybody. I wanted to ask about the breadth of demand when the pandemic started and your business started to improve a lot of chatter about the low-end and spec homes trading at a premium. As you've looked over the last quarter or two, have you begun to see that broaden, David, into both 2-V builds and into other segments, including sort of the Emerald brand, Freedom brand and the higher end of the Horton brand?

Carl, we've seen better demand across the spectrum. Having a house that you're going to deliver in 30 days, I did think put you in a very strong position to drive value for the shareholders. So as Mike said, our inventory is much younger. But the demand is out too. It's - I don't know if I've - how many times I've said it but in 32 years, best market I've seen. And it does feel sustainable, unlike what was the fast demand in the last big up-cycle.

Thank you. And then Jessica, you mentioned towards the end of your remarks about more substantial investment in multifamily and single-family rental. And then I think you mentioned M&A. And given the cash balance and the returns you're seeing in housing generally. Can you talk a little bit about the opportunities that you see in multifamily and single family rental? And has anything changed in the M&A environment that makes you more interested besides the fact that returns are great right now on homebuilding?

No, I think we've taken a balanced approach across our business, and I did mention that we're first and foremost focused on reinvesting in our homebuilding business, because we see very attractive return opportunities. But the great thing about what we've done with our business model, as you know, Carl, over the past few years, generating over $5 billion of cash flow in the last five years, gives us a lot of opportunity to not only reinvest in the homebuilding business, but also invest in these other opportunities that we also do think will over time be returns accretive as well. Both multifamily, single-family, we look to those as very strong opportunities. We did take a brief pause on some of that earlier in the year, but now that the market has recovered and really the pandemic slowdown didn't last nearly as long as I think anybody would have expected. We're back to investing in both of those businesses as we would have originally expected. I think Mike said in his prepared remarks, we would expect to double our investment in both of those platforms in fiscal 2021 as compared to the end of fiscal 2020. And then M&A, you've heard us talk about, I think, every single quarter. It's something we continue to be interested in. But with our footprint, our platform, our people, we are in a very strong position to where we can organically grow and deliver on our growth expectations, continuing to consolidate share regardless of M&A, so we can be very opportunistic on that front. But we are interested in continuing to explore those opportunities. If we find the right builder, the right team, the right platform, of course, at the right price. But it can be a very great way to enter a new market, as you saw us do this quarter with a relatively small acquisition we did that gave us interest in trend, excuse me, into a new market in Texas and Corpus Christi.

And I'd just add on to that, Carl, that we see the rental operations, those businesses. Yes, we have capital that we see to invest or will we find that there's a real synergistic operating platform with our homebuilding builders. And we've seen that in the sourcing of opportunities as well as the execution of construction and just our general approach and focus on the business. So we've been really excited about the opportunities and the returns we see on the horizon there.

And Carl, I'll just add, again, back to the scalable, sustainable program. Large percentage of the population in the US, they never got to own a hold, sad is it has to say. And I do think having the capabilities to execute on the rental side does derisk our operating platform somewhat and will add a significant value to the shareholders as we build that platform out.

I appreciate it. Thanks a lot folks.

Thank you. Our next question comes from Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys. Good morning. Congrats on the phenomenal quarter and results. My first question is just thinking about the volume growth rate. Traditionally, I've always kind of thought about the trend in your spec inventory is a pretty good barometer of where you see the order book growing over the next quarter or two. And it seems like recently, there's been a fairly wide disconnect there with spec inventory trending lower year-over-year and order growth hitting new all-time highs for you guys. So it seems like you're seeing a greater percentage of your business now on the to be built side as opposed to spec, just looking at current order activity. So first, I was curious if you could quantify what that mix looks like. And also, how high do you – are you comfortable taking that to-be-built component of your business going forward, recognizing that it's probably pretty tough to keep pace with the spec starts and the demand today.

Yes. I would pick up the last comment you made, that it is very tough to keep up with demand today. If we start a home, we see that there's demand for it and it's absorbed in the marketplace. With regard to our to be built sales, we're still seeing about the same proportion of our sales coming through in the to be built. I would say that it is higher as an absolute number being higher because our total sales demand is much higher than it has been. But we continue to focus on starting our specs and starting out to-be-built and then limiting the sales availability for to-be-built in various decorates, being sure that we have the capacity to start that home within a reasonable time frame that it's within our control to do so and not to leave it out there for a long period of time.

And so a lot of the houses we're starting today are just pre-planned production starts that were how we were going to start anyway. So we don't necessarily think about them as it to-be-built. It's still very efficient. We're just selling into that pace before we've actually started that home. It's not necessarily a pickup and build jobs it takes a little bit more of a build time and offers more customization or option.

With the sales office a few months ago and the agent I was talking to said that, foundation is the new carpet. And that as soon as we get a foundation going in, there's tremendous demand that people want to get onto that house and be in line by it.

Got you. That's very helpful context. And second, we've heard from a lot of your competitors about the need to intentionally slow sales activity for a multitude of reasons, either closing out of communities faster than expected, difficulty sourcing labor, difficulty sourcing materials, not wanting to extend the backlog too far where you don't have visibility into costs. So I'm just curious, it doesn't seem like you guys are doing that, at least not on a widespread basis. But do you envision having to potentially do that in the near term-based on where your supply side and the demand side is today? Or do you think you can continue selling to demand really indefinitely based on what you see in the market today?

We approach it from a subdivision-by-subdivision standpoint. And where we have the lots out in front, we build to a pace that maximizes our returns both on equity and inventory. And it's – it’s really driven by the individual divisions and the markets that they operate in. I can tell you, we have projects where we've raised pricing an attempt to slow down sales and didn't see much of a change in the sales pace. So it really is driven by the production capability of that division in that submarket as to whether they can deliver more homes or they need to slow it down. There is some tweaking of that out in the field, obviously. I mean it's – you're at the back end of a subdivision, you want to drive the highest margin you can. But if you're on the front end or in the middle of a big, big community, which we have numerous big, big communities, you've got to be very careful with your price appreciation on your sales pace. Because nothing stops us like letting, one guy buy at one price and then having to incentivize or drop the price on somebody else down - in three, four months down the road. So it's - we call it odd not site [ph] in various project-by-project, division-by-division. And we trust our operators out there, who make those decisions. And it's been working for us for a very, very long time.

And Alan, in spite of extraordinarily increased demand and up sales this quarter, we did see our community count go up, 3% on a year-over-year basis and 2% sequentially, which is really the first time we've seen a meaningful change in our community count. And that's in spite of 80-plus percent increase in sales this quarter. We've been talking for a long time. So all, I think, that comes up on every call, about when is the community count coming, and we've got the lots. And the community is ready to go. And they're going to continue to replenish our community count and bring new communities online, which is going to help us support our continued growth in fiscal 2021.

Great.

Alan, everything we've done, since the last down market has been to derisk our land and loss of ply. And we are uniquely positioned with a very long runway on land and lots. And it's surprising, as it seems. But every time I go out, I see at least one or two deals in the division, that's better than anything else they have today. And that's the result of focusing on the relationships within these markets and treating these trade partners and land sellers, like partners and like, they are integral part of our business. They are an integral part of our derisk, derisking our balance sheet, generating cash flow and positioning us to grow and gain market share, at a pace that is driven by the market, not by our inability to deliver to that.

That's great. Thanks a lot guys. Best of luck.

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Please proceed with your question.

Hi. Thanks. Good morning everyone. And again, congrats on the results, I wanted to hit on, a little bit of a bigger picture question. I think when you look at how the stocks have pulled back a little bit off their highs in the last month or so, various reasons for that. And particularly with the vaccine out and thoughts - investor thoughts around maybe a market rotation and a return to normal in various ways, I think the debate over the next, call it, three to six months is going to be whether or not current sales pace is peak, whether or not fiscal 2021, earnings is peak. I'd love your thoughts on that. And obviously, from a cyclical standpoint, we're just barely getting back to long-term averages in terms of housing starts. But how do you think about, the sustainability of sales pace that you're currently seeing? If there are any governors on that, again, with regards to the prior question around perhaps restricting sales and allowing your construction pace to catch up. But how do you think about where you are in the cycle, where you are versus peak earnings and the ability to sustain. It's not exactly at current sales paces, but thereabouts to allow your earnings to go higher over the next few years?

Mike, it feels like there is runway in this market. And I say that because when I'm out talking to the really the division managers within these markets. They talk about employment growth. They talk about population growth. They talk about the positioning that they have. And I just don't get a sense that this is a frenzy or overheated environment out there, where people are speculating on housing. It's family formation, it's downsizing, it's a lot of different things that I believe, anyway are long-term demographic shifts. And when I look at where we are, and what we're doing and our product positioning and our cross point positioning are incredibly deep, very talented, long-tenured employees. It just feels like it's - we got - this market still has…

And Mike, from a positioning standpoint, we positioned ourselves to be in a very strong and flexible position to adjust to anything that does change. As we look at the broader market, inventory levels are still tight relative to demand. As you mentioned, we're still not back to even normalized levels over the long-term of normalized housing starts. And so from that standpoint, we just want to stay as flexible as we can. We've been through cycles. We recognize there will be times when the cycle turns, and we're going to be in a very strong position to adjust to that. We would never plan out our business model to show an 81% sales increase in one quarter, but we do position ourselves to grow consistently and gain market share. And right now, we're in a very strong market where overall growth rates are stronger than we've seen, and so we're outperforming that. When things moderate to slightly lower levels than they are today, our expectation is we'll be in a position to outperform that. But with a lower risk profile and the ability to preserve the downside on earnings when things do come under pressure at whatever point that is. But again, right now, we see a good market right in front of us, and we're going to make sure we stay positioned with affordable homes and our production in front of what we see the demand to be.

Great. Thanks, guys. Appreciate that. I guess second question, if possible, look to delve in a little bit more and revisit some of the order trend, trend lines that you've been seeing in the last few months. I think you started out the quarter up around 50% or maybe above 50%. I forget the exact language. You ended the quarter with a growth of 81%. I'd love to get the breakout of August and September, if possible. And with October up also around 50%, it implies, obviously, a deceleration from ridiculously strong number, I presume. Just wanted to get your sense, again, gross margins up roughly 150 basis points over two quarters. If you go into first quarter from third quarter, your inventory has sold down dramatically. I just wonder as well around if either some of the price increases that have come through or again, in certain instances, maybe you're just holding back a little bit on sales growth or order taking to allow a catch-up here. If that's how we're supposed to understand where we are in terms of the current order trend because obviously, going from something, obviously, well north of 80% for the last couple of months on average, back down to 50%, just trying to think through the drivers of that.

Sure, Mike. So we're not giving specific monthly quarter trends. But we did say back in July, that our July sales were up greater than 50%. Bill mentioned that our October sales are up greater than 50%. And they're not up as high as the fourth quarter as a whole. So you came back into August and September where we're stronger. But as Bill already alluded to, we don't ever have a business plan that our sales are going to grow 81% on an annual rate or really even in the quarter. So it really continues to be a balance community by community. And so there's still some communities that are performing at very, very strong order rates and there are some where we've taken some price because of our - either our housing or our lot position and has slowed the sales pace to some extent to where we've settled out somewhere between that $50 million to $81 [ph]. What we've guided to for the full year for closing is to be at 18% to 22%. We'll see how the spring unfolds. It doesn't mean we can't do better than that based on how we're starting off the year, our houses, our lot position, our product, our people, all of this things we believe put us in a very strong position to consistently outperform the market again in fiscal 2021. But with it only being one-month into the year, that's where we feel comfortable headed for the year.

But our first quarter guidance for closings is up mid-30s.

Yes.

And so we see stronger growth than that in the first quarter, the short-term visibility. And then longer term, we'll see what sales demand and positioning are as we get into the spring.

So just to understand then, what you're saying is that the upside in -- that the upside potential case for closings growth in 2021 could be driven off of a continued robust order pace in the first half and not necessarily production constraints?

Correct.

Don't hear us say we have significant production constraints. There are always some, but we feel very good about our positioning and ability to continue to increase production and sustain production levels.

Perfect. Thank you.

Thank you. Our next question comes from Matthew Bouley with Barclays. Please proceed with your question.

Good morning. Thanks for taking the question. I wanted to ask about the percentage of lots controlled through contracts up to 70%. I know you talked about it earlier. I heard you say that it's basically a reflection of kind of the long-term strategy coming to fruition, I guess. But I mean just how quickly you moved up in that percentage in this unusual year. My question is, if there's any kind of measure of risk mitigation that is signaled into how you view the sustainability of housing demand? And I guess the terms on these lot contracts have changed at all or gotten any less favorable perhaps to D.R. Horton on balance?

Well, again, because of our scale and absorption pace per community, we get favorable terms in the market. The land price has gone up, absolutely, they have, but when the seller is looking at his risk side equation. Do you want investment-grade high absorbing company buying your lots or do you want somebody else buy? And that has worked to our advantage as we have continued year after year after year after year to build relationships with these people. So from a risk standpoint, having a set price, you're drawing a lot at some point in the future is significantly less risky than on the land. So – and it's also just a much more efficient use of capital. So that's something that we're going to continue to work on and I think get better at.

And really, it's been our focus this entire cycle is to push that percentage up. So that percentage increasing is not a read on the market. It's just a read on our continued success in building those relationships, Forestar developing its platform and putting this in a very strong capital-efficient way to run our balance sheet. Yes, does it de-risk us to the downside to some extent, but it's really more about the capital efficiency and driving improved returns.

Okay. Understood. Thank you both for that. Second one, just back on the gross margin. I think I heard you say that perhaps cost inflation in the quarter maybe didn't come in to the extent you initially expected. And correct me, if I misheard that, but just thinking about the volatility in lumber prices and how that typically runs through your P&L a little quicker than others. Can you just comment to what extent lumber was a still more of that headwind to come in Q4 and if there is still more of that headwind to come in Q1? Just kind of what's assumed around how that flows through? Thank you.

Yes, Matt. We would expect that we had a little bit of that headwind in Q4 in the September quarter. But I think we'll see more of it in most of our lumber headwind hit and pass-through in the December quarter, and that was factored into our margin outlook of around 23% for the quarter.

Understood. Thanks, everyone.

Thank you.

Thank you. Our next question comes from Eric Bosshard with Cleveland Research. Please proceed with your question.

Good morning.

Good morning, Eric.

Two things curious about. First of all, on the cost and input side of the equation, sticks and bricks and labor and land, curious in terms of what you're seeing and anticipate in terms of not only cost but availability. You could just speak to both sides of that, where we are and what you see in the next call it, six or six months?

Yes. We have seen and we telegraphed that we've seen some cost inflationary pressures on some of the lumber, a bit of the other materials and certainly, labor but with our market scale, deep long-term relationships, our production approach and orientation of the business, we're able to work with our local trade suppliers. Aggregate the only market share, but also aggregate labor share in a given market. And by maintaining a sustainable starts pace that allows them to plan their business as well. And it's – again, it's like what David mentioned to you before on the – the lot developers. Would they rather work with a production-oriented investment-grade building platform, for somebody else? And oftentimes, we're able to do attract and retain labor through market cycles. I mean, we have consistently paid our bills on time, and worked with these folks as partners through market up cycles and down cycles. And there is long memories here and long relationships. So we're able to get the labor to our job sites. We expect we will have pricing changes. It will go up and it will go down. But we expect to have the FLA [ph] brought our job sites.

From a material standpoint, as we've said and, is very clearly known in the industry, there are increases that are occurring. And we're anticipating that. All of that is anticipated in our forward margin guide, which we're anticipating a slight improvement in our gross margin going into Q1. From an availability standpoint, there are periodic shortages of certain products in various areas. And so our operators and our national purchasing team is working with our suppliers on, addressing those, making substitutions where we need to, in order to address those. But nothing that is causing significant holdbacks on our production. Right now, current shortage of the day is windows. And so we're seeing probably more issues with windows than anything else. But again, it's just part of the business, part of where we are in the process and addressing those as we need to.

And I'll say that, everything we've been working on, market share gains, liquidity, derisking the balance sheet. All those things help in any market, but it's a true advantage and a good market.

Great. That's helpful. And then, just to follow-up, the gap between orders and backlog and deliveries is as wide as it's been. Do you have any -- I assume the delivery number is as good as it can be, in terms of what you can do. Do you have any concern about the sustainability of orders and backlog, I guess, trying to get to the patients of your customers to wait for, what's probably a little bit more of an extended delivery schedule than they might normally be used to with, your company?

I think if you look over time, you may see that we have buyers in backlog a little bit longer, during our production cycle, because we've been selling some of our production earlier, in its production cycle. But compared to there are alternatives in the marketplace today, I think you'll consistently find that we're delivering homes faster, than any of the alternatives that are available to those individuals today. So over time, it may change a little bit, but the relative comparison as to what else is available at that point in time, when you make the buy decision, as opposed to as much a repeat customer in a short time frame, it's a different customer comparing competing alternatives.

Okay. That's helpful. Thank you.

Thank you. Our next question comes from Adam Baumgarten with Credit Suisse. Please proceed with your question.

Hey, everyone. Thanks for taking my questions. Just on the margins, the gross margins, they've stepped up pretty nicely in the fourth quarter and then you guided for the first quarter. How should we think about the sustainability of those as we move through the year? And maybe some of the puts and takes you may be looking out to going forward?

I think we've generally talked about some of the puts and takes. I mean there's three big buckets, right? They go in to [indiscernible] certainly and our labor and our materials and really all three are a headwind today, but we've been able to offset that with price. And I think also manage our increases in lot labor and material is probably better than the industry as a whole because of our scale, both locally and nationally. So the market conditions are to hold and remain a bit robust as we move throughout the spring. We would hope there is some upside to our margin as we move throughout the year. But it's really too early for us to put any color around what the margin looks like for the full fiscal year of 2021 until we see the spring selling season, which is why we're really only specifically guiding to the Q1 gross margin around 23%.

Okay. Great. And then just any commentary on cycle times? Have they changed much? Have you seen any lengthening over the last three or so months?

Actually, been very impressed with their opinions that they've been able to hold and even compress our EBIT cycle times in the build process. We always set goals to get better in our operations every day and pleased to see that the teams have delivered on that.

Great. Thanks a lot.

Thank you. Our final question comes from Truman Patterson with Wells Fargo. Please proceed with your question.

Hey. Good morning everyone. Nice results. Just had a couple questions that I wanted a little more clarity on. Jessica, community count, could you give an outlook for fiscal 2021? And I know you all don't necessarily view community count as a great indicator, if you will. So I'm really hoping to understand, at the local level, are there any muni permitting constraints, any horizontal lot development constraints, zoning board issues, et cetera? Or is it pretty much business as usual and then on - I believe you all already gave a number, but I didn't hear it. Could you give us the number of finished lots you have currently? And then also the number that are under development?

Sure. So our finished lot count that was - we didn't give the actual count, but we said 30%. So 34,000 of our owned lots are finished. And then another 50% of our controlled lots are - will be finished when we purchase them. So that'd be roughly 132,000 lots. So roughly 170,000 lots in total that either are or will be finished once we purchase them. In terms of community count, as I mentioned, it was up 3% year-over-year, 2% sequentially. Really, with the size of our platform and the number of absolute communities we already have, we don't generally anticipate it moving much more than that. It's probably up no more than a low single digit percentage and there can be some quarter-to-quarter variability to that as well. But I think we do believe as we move throughout fiscal 2021. On average, our community count will be up slightly.

Okay. Okay. Thank you for that. And then finally, on some labor constraints, your backlog units are up 96%, I think. Are you all finding enough labor to actually get all these homes started? I know you all build up your guidance from the community and the division level. Are there any areas where you're seeing a large degree of labor constraints or on the flip side? Are you having any local areas where you're seeing I will just called an abundance of labor currently?

I wouldn't characterize anything as an abundance of labor. But I would say - the thing we look at to monitor that is our overall cycle times. And we did actually see those hold and compress here very recently. So we're very pleased with that. That's telling us that we're getting labor on the job sites and getting the homes completed. And the composition of our homes inventory to be more favoring the backlog is simply a function of demand. It's not taking us longer to build the houses. We're just selling them earlier in the production process than we might have a year ago.

Okay. Thank you.

I'll just add driving efficiency for the last 10, 11 years is the reason we're able to deliver the houses we're selling. We are - we try to create simple processes that expand our labor base without expanding the number of people, and we are benefiting from that today.

Paul, we'll go ahead and give our closing remarks then.

Thank you, Paul. We appreciate everybody's time on the call today and look forward to speaking with you again in January to share our first quarter results. And finally, congratulations to the entire D.R. Horton team. Not only were you the first homebuilder to close more than 50,000 homes in a year, you are now the first to close greater than 60,000 homes and are solidly on the way to being the first to close 80,000 homes in a year. You're truly the best in the industry, D.R. Horton and this entire executive team continues to be hollered and honored to represent you on these calls. Stay safe, stay strong. Talk to you in January.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.