Good morning, and welcome to the Third Quarter 2024 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 former presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the third quarter of fiscal 2024. Before we get started, today's call includes 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 factors that could lead to material changes in performance is contained in D.R. Horton’s annual report on Form 10-K and its 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 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 Executive Chairman.

Thank you, Jessica, and good morning. Before we discuss our results, I wanted to take a moment to pay tribute to our Founder, Don Horton, who passed away in May. Don was an incredible man with an unstoppable drive and work ethic that established the foundation and culture of our company. D.R. Horton, the Company would not exist as it does today without Don's tireless pursuit to help as many Americans as possible achieve the dream of home ownership. This simple mission has driven us from the first home that Don built, sold and closed himself more than 45 years ago through the more than 1 million homes our company has provided for families across the country. We are thankful for Don and we and all D.R. Horton employees are beneficiaries of his life's work. Along with our homeowners, customers, contractors, suppliers, land sellers, real estate brokers, and everyone else, Don included, in his family. It is bittersweet to be talking about the company's results publicly for the first time since his passing. Don took great pride in the company's growth, profitability, and shareholder returns, which have been at the top of all public companies in America for the past decade. We will work every day to preserve this legacy and continue to build upon it to improve our operations and the value of our company. We would also like to thank the countless people who contacted us to share their condolences and memories. We received hundreds of messages from employees across the country, and we heard from many industry leaders of other home building companies. Our suppliers, lot developers, bankers, and so many more. On behalf of Don's family and our company, we thank you for the kind words and tributes to a remarkable man. He will be missed. Now I'll turn the call over to Paul Romanowski, our president and CEO.

Thank you, David, for sharing those words and sentiments about Don on behalf of all of us at D.R. Horton. In addition to David and Jessica, I am pleased to also be joined on this call by Mike Murray, Executive Vice President and Chief Operating Officer; and Bill Wheat, Executive Vice President and Chief Financial Officer. For the third quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $4.10 per diluted share, which was an increase of 5% from the prior year quarter. Our consolidated pre-tax income increased 1% to $1.8 billion on a 2% increase in revenues to $10 billion, with a pre-tax profit margin of 18.1%. During the nine months ended June 30th, we generated $972 million of cash flow from our home building operations and consolidated cash flow of $228 million. Our home building return on inventory for the trailing 12 months ended June 30th was 29.5%, and our return on equity for the same period was 21.5%. Although inflation and mortgage interest rates remain elevated, the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remain favorable. Homebuyer demand during the spring selling season was good despite continued affordability challenges. With 42,600 homes in inventory and an average selling price of approximately $380,000, we are well positioned to continue consolidating market share. Our average construction cycle times are back to normal and improved from the second quarter, driving additional improvement in our housing inventory turns. We remain focused on enhancing capital efficiency to produce consistent, sustainable returns and to increase our consolidated operating cash flows so that we can return more capital to shareholders through both share repurchases and dividends. Mike?

Earnings for the third quarter of fiscal 2024 increased 5% to $4.10 per diluted share compared to $3.90 per share in the prior year quarter. Net income for the quarter is $1.4 billion on consolidated revenues of $10 billion. Our third quarter home sales revenues increased 6% to $9.2 billion on 24,155 homes closed compared to $8.7 billion on 22,985 homes closed in the prior year. Our average closing price for the quarter was $382,200, up 2% sequentially and up 1% from the prior year quarter. Bill?

Our net sales orders for the third quarter increased 1% from the prior year to just over 23,000 homes and order value was flat at $8.7 billion. Our cancellation rate for the quarter was 18%, up from 15% sequentially and flat with the prior year quarter. Our average number of active selling communities was up 3% sequentially and up 12% year-over-year. The average price of net sales orders in the third quarter was $378,900, which is flat sequentially and down 1% from the prior year quarter. To address affordability, we are still using incentives such as mortgage rate buy downs, and we have reduced the prices and sizes of our homes where necessary. Although our home sales gross margin improved sequentially this quarter, incentives are elevated and we expect them to remain near these levels assuming similar market conditions and no significant changes in mortgage rates. Jessica?

Our gross profit margin on home sales revenues in the third quarter was 24%, up 80 basis points sequentially from the March quarter. Our gross margin was better than expected, primarily due to lower incentive costs than in the second quarter. On a per square foot basis, home sales revenues were up 2% and stick and brick costs were down 1% in the quarter, while lot costs increased approximately 2.5%. For the fourth quarter, we expect our home sales gross margin to be similar to the third quarter. Further out, our home sales gross margin will continue to be dependent on the strength of new home demand, changes in mortgage rates, and other market conditions. Bill?

In the third quarter, our home building SG&A expenses increased by 12% from last year, and home building SG&A expense as a percentage of revenues was 7.1%, up 40 basis points from the same quarter in the prior year. Fiscal year-to-date, homebuilding SG&A was 7.5% of revenues, up 30 basis points from the same period last year, due primarily to the expansion of our operations, including new markets and an increased community count. We will continue to control our SG&A, while ensuring that our platform adequately supports our business. Paul?

We started 21,400 homes in the June quarter and ended the quarter with 42,600 homes in inventory, down 3% from a year ago. 26,200 of our homes at June 30th were unsold. 8,800 of our total unsold homes were completed, of which 990 had been completed for more than six months. For homes we closed in the third quarter, our construction cycle times improved slightly from the second quarter, bringing us below our historical average cycle times. Our faster construction and housing terms allow us to manage our homes and inventory more efficiently. We plan to maintain a sufficient start pace and homes in inventory to meet demand, while remaining focused on improving capital efficiency. Mike?

Our home building lot position at June 30th consisted of approximately 630,000 lots, of which, 24% were owned and 76% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 64% were on a lot developed by either 4 Star or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our third quarter home building investments in lots, land and development totaled $2.5 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $750 million for land development and $340 million for land acquisition. Paul?

In the third quarter, our rental operations generated $64 million of pre-tax income on $414 million of revenues from the sale of 790 single-family rental homes and 610 multifamily rental units. We continue to operate a merchant-built model, in which we construct purpose-built rental communities and sell them to investors. Our rental operations provide synergies to our home building business by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and land parcels. Our rental property inventory at June 30th was $3.1 billion, which consisted of $1.1 billion of single-family rental properties and $2 billion of multifamily rental properties. We expect our total rental inventory to remain around the current level for the next several quarters. Jessica?

4 Star, our majority-owned residential lot development company, reported revenues of $318 million for the third quarter on 3,255 lots sold with pre-tax income of $52 million. 4 Star's owned and controlled lot position at June 30th was 102,100 lots. 63% of 4 Star's owned lots are under contract with or subject to a write-off first offer to D.R. Horton. $270 million of the finished lots we purchased in the third quarter were from 4 Star. 4 Star had approximately $745 million of liquidity at quarter end with a net debt to capital ratio of 18.7%. Our strategic relationship with 4 Star is a vital component of our returns-focused business model for our home building and rental operations. For 4 Star's strong, separately capitalized balance sheet, growing operating platform, and lot supply, position them well to capitalize on the shortage of finished lots in the home building industry, and to aggregate significant market share over the next several years. Mike?

Financial services earned $91 million in pre-tax income in the third quarter on $242 million of revenues, resulting in a pre-tax profit margin of 37.7%. During the third quarter, essentially all of our mortgage company's loan originations related to homes closed by our home building operations. And our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 56% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 88%. First-time home buyers represented 57% of the closings handled by a mortgage company this quarter. Bill? Bill Wheat Our balanced capital approach focuses on being disciplined, flexible and opportunistic to sustain an operating platform that produces consistent returns, growth and cash flow. We have a strong balance sheet with low leverage and significant liquidity which provides us with the ability to adjust to changing market conditions. During the first nine months of the year, our consolidated cash provided by operations were $228 million, and our home building operations provided $972 million of cash. At June 30th, we had $5.8 billion of consolidated liquidity, consisting of $3 billion of cash and $2.8 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.7 billion with $500 million of senior notes maturing in October, which we expect to refinance. Our consolidated leverage at June 30th was 18.8%, and we plan to maintain our leverage around or slightly below 20% over the long term. At June 30th, our stockholders' equity was $24.7 billion, and book value per share was $75.32, up 18% from a year ago. For the trailing 12 months ended June 30th, our return on equity was 21.5% and our consolidated return on assets was 14.8%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million. And our board has declared a quarterly dividend at the same level to be paid in August. We repurchased 3 million shares of common stock for $441 million during the quarter. Our fiscal year-to-date stock repurchases through June increased by over 60% from the same period last year to $1.2 billion, which reduced our outstanding share count by 3% from a year ago. Based on our strong financial position and expectation for increased cash flows, our board recently approved a new share repurchase authorization totaling $4 billion. Jessica?

For the fourth quarter, we currently expect to generate consolidated revenues of $10 billion to $10.4 billion and homes closed by our home building operations to be in the range of 24,000 to 24,500 homes. We expect our home sales gross margin in the fourth quarter to be around 24%, and home-building SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pre-tax profit margin of around 35% in the fourth quarter, and we expect our quarterly income tax rate to be approximately 24% to 24.3%. For the full year of fiscal 2024, we now expect to generate consolidated revenues of $36.8 to $37.2 billion and expect homes closed by our home building operations to be in the range of 90,000 to 90,500 homes. We continue to expect to generate approximately $3 billion of cash flow from our home building operations in fiscal 2024. Finally, we now plan to repurchase approximately $1.8 billion of our common stock for the full year in addition to annual dividend payments of around $400 million. We plan to provide guidance for fiscal 2025 in October when we report our fourth quarter earnings and after we have completed our annual budgeting process with our operators. We expect to be positioned to increase our market share further next year. We also expect to generate increased cash flow from operations in fiscal 2025, which we plan to utilize to increase our returns to shareholders through proportionately higher share repurchases and dividends. Paul?

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and focus on affordable product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow, while continuing to aggregate market share. We have significant financial flexibility and we plan to maintain our disciplined approach to capital allocation by providing consistently high returns to our shareholders to enhance the long-term value of our company. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. This concludes our prepared remarks. We will now host questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from John Lovallo from UBS. John, your line is live.

Good morning, guys. Thanks for taking my questions. The first one is, absorptions were somewhat worse than normal seasonality I would suggest. I know there's been some noise in normal seasonality over the past few years. But margin was 50 basis points above the high end of your outlook at 24%. So I guess the question is, did you guys focus more on profitability per home versus maintaining the sales pace, maybe as rates rose in April? And along those lines, absorptions tend to decline, call it, 15%, maybe a little bit more percent quarter-over-quarter in the fourth quarter. How are you thinking about this kind of the seasonality in the fourth quarter?

Yes, John. We continue to balance price and pace to drive the returns that we're looking for community by community. We saw choppiness through the quarter in demand as you saw fluctuation in interest rates and we responded accordingly. We did maintain incentives, but didn't lean in too hard and I think that's where you saw the result in the overall sales pace, but still feel good about our position, about the backlog we have, and the opportunity to perform on our guidance for the full year.

Got it. Yes, it was a good outcome. And then maybe the next question is in the Southeast, which obviously encompasses Florida and South Central, which has Texas in it. Orders were a little bit lighter than what we were looking for. And I think when we spoke in the quarter, Paul, it seemed that the pickup in existing home inventory in those markets was characterized as more of a normalization than a glut. I think the thought was that the age of the existing housing stock and the price points just weren't that competitive with DHS product. How are you thinking about existing home inventory in those two markets specifically today? And did higher inventory negatively impact the orders in the quarter? Thank you.

I think similar to what we've seen last quarter and through today. Yes, inventory continues to increase, not just in Florida, but across the markets. But we still feel good about our competitive advantage, especially in the price points that we operate in and with the incentive package and opportunity with being able to be flexible on rates. And so, I don't think that some of the flatness in sales that you saw across those regions was significantly impacted by increase in inventory, and we still feel good about the demand, just not as vibrant as it was in prior quarters.

Great. Thank you guys.

Thank you. The next question is coming from Carl Reichardt from BTIG. Carl, your line is live.

Thanks. Good morning, everybody. Once again, for me, as I expressed to you all privately, my condolences on [DRS] (ph) passing. I'm really very sorry for your loss, and the industry's too. So that said, John took one of my questions, but I wanted to ask about inter-quarter sales and closings. I think it was over 50% last quarter. I'm curious what it is this quarter. And given that you're back to really normalized cycle times and you've got a good amount of inventory heading into Q4 and into next year. What's your guess sort of long term as to sort of the sales closings inter-quarter level is going to be on a go forward basis?

I think we've seen with the volatile interest rate environment a choppy traffic pattern. When rates move, the traffic patterns are impacted and we saw that through the quarter. I think we ended the quarter with better traffic patterns, better demand and felt that coming into July. What we would also see is that, people are trying to have interest rate certainty when they're buying a home, and so homes that are closer to completion are more attractive, because they can get into a better interest rate that we can help them with on our [Builder Forward] (ph) program. And at the same time, that means they're buying a little bit later and so we're seeing a high level of homes sold and closed in the same quarter. We're focused on a start space to drive a closings number and the sales are going to occur between those two things.

Okay. And then one of the elements you guys have talked about in the past, I think it's still in your deck, is this idea of getting your cash in and out of land deals in 24 months. And I'm kind of curious as you're looking at deals going forward here, obviously, we've seen entitlements, lot development times take longer and longer. Is that still realistic to expect that as you underwrite you're going to see that? And maybe what percentage of your current communities right now have hit that goal of getting your cash in and out within 24 months of those transactions. Thanks, all.

Carl, yes, that has been a standard of us on underwriting for several years, and we intend to hold to that. We really aren't looking to own that land until it's shovel ready. So although the entitlement may take longer, we are positioning ourselves in expectation of that time so that we can have properties under contract and/or third party development partners involved to help. And so the more lots that we have, more homes that we're building on lots that were developed by a third-party developer, makes it easier for us to maintain that 24 month cashback. So we don't always hit it. We'd love to say we do. But reality sets in sometimes, but it's absolutely an underwriting standard that we intend to hold on to.

Great. Appreciate it, guys. Thanks.

Thank you. The next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.

Yes, thanks very much, guys. Let me also echo what Carl was -- Carl's sentiments about DR. Really a great man, and it was a real pleasure to work with him all those years. I do want to ask about your cash flow commentary, which I found very encouraging, both in terms of the remaining quarter you have this year and then also your intimations about next year. I think you said you were looking to increase -- you expected or hoped to increase free cash flow next year and, obviously, deploy that maybe more towards repurchases and dividends. So just leaning into that a little bit more, your guidance has typically been around home building, operating cash flow where rental and 4 Star have kind of been offsets to that. So your consolidated free cash flow is obviously being a little lower than your -- or meaningfully lower than your home building cash flow. But you said, I think I heard you right, that the rental inventory is going to remain consistent going forward. So does that mean that going forward your home building operating cash flow is going to be much closer to your consolidated? And when you talk about hoping to increase your free cash flow, are you talking home building or you talking -- or can we say, now that's pretty much consolidated free cash flow increasing next year?

Thanks, Steve. Thanks for asking this question. This helps us clarify this. Yes, we are talking about consolidated cash flow. And going forward into fiscal 2025, we would anticipate any future guidance that we provide on cash flow will be based on a consolidated basis. With our rental inventory now flattening out, stabilizing within a range around the current level, we would anticipate that our consolidated cash flow will be much nearer to the home building cash flow level. There won't be as much of an offset from home building cash flow from rental. 4 Star is consolidated in our financials. We would expect them to continue to use cash flow, but just as a reminder, they're totally separately capitalized, so it really doesn't impact the cash flow we have available to utilize for shareholder returns. But with the sharp improvement in our cycle times this past year. Our inventory turns have improved. We expect that improvement to continue into next year. So the efficiency in our home building operation is improving and therefore the cash flow generation from our income should continue to improve. With stabilization and rental, we do expect an increased level of consolidated cash flow next year. And then that's reflected in the increased share repurchase authorization that our board authorized that we'll be utilizing going forward as we expect to see proportionally higher share repurchases and dividends being paid out of that cash flow.

Well, that all sounds pretty great. So thanks for that. That does also segue very nicely to my next question, which relates to your levels of spec inventory and backlog turns that we can expect. Your guidance for the fourth quarter closings implies a fairly high level of backlog turnover. And I'm wondering if you can give us a sense for what is a comfortable level of backlog turn that we can expect going forward? Is what we're seeing this year kind of -- can we expect kind of a similar level on a going forward basis? And tied to that, your spec inventory, I think you're running at like 26 total specs per community. Oh, actually, you don't report to the community. Let me put it this way. Whatever your spec levels are per community, where they are today? Is that about what we can expect on a go-forward basis, both on a total basis and on a finished basis? Or if you can give us some color there on terms of what is a target range for finished specs and normal specs and backlog turnover ratio?

Sure, that was a lot to unpack Steve, but I'll do my best to answer all of your questions. So on the latter part, there really is no global expectation for number of specs. We run the business as you know, community by community. And so, our operators are adjusting based on their sales environment in each individual community in terms of what they're starting and how many specs they're going to carry based on their sales run rate that they're experiencing. And so they can adjust very quickly to current market conditions in terms of either slowing down or speeding up, assuming we have the finished lot position to do so. So that kind of just rolls up from the bottoms up perspective. We're very comfortable with where we are today. As I think Paul's remarks on the call said, we're selling homes still later in construction. And to one of Mike's earlier points that we -- buyers want a certainty of close. And so, the 60 to 90 days of being able to lock the rate, we're very comfortable with our completed spec position today. And it is allowing us to run at much higher backlog conversion rates than we have historically. We don't really focus on backlog conversion. We focus on turning our houses and not running with an excess supply of completed specs that have been sitting for an extended period of time unsold. And so, that's really our focus is on continuing to turn our houses faster. And as long as those completed specs aren't aged for an extended period of time, we're very comfortable running with the levels we're at today.

Okay. That's helpful. Thanks very much, guys.

Thank you. The next question is coming from Mike Rehaut from JPMorgan. Mike, your line is live.

Great. Thanks. Good morning, everyone. And I also wanted to express my condolences on the loss of D.R. Obviously, a great leader and visionary for the industry, and he'll be sorely missed. I wanted to start off my first question just on some of the comments you made around, I think earlier you said there was some choppiness during the quarter, obviously, with rates earlier in the quarter being a little higher. At the same time, you talked about incentives maybe being a little less than you expected and that drove the gross margin upside. I was just kind of curious as rates maybe subsided a little bit or came down perhaps to the lower end of their range that we've seen in the last 345 months, if any of that choppiness has subsided? And it appears that maybe incentives are similar as you see them going in 4Q versus 3Q, but if it's had any impact on either incentives or just more broadly demand trends as those rates have come in a little bit in the last month or so.

Obviously, any pullback in rates, we would call beneficial, and we would expect to have some relief on the incentive front, as incentives are able to be reduced, or at least the cost of the incentive that we're offering. But we are still balancing that with just overall affordability issues in the market today. And we do continue to experience higher lot costs, which is why our guide for Q4 would be a relatively flat gross margin. Because even if we do have the ability to pull back on incentive costs to some extent, we do have cost pressures particularly on the lot side.

Okay. No, that's helpful and makes sense. Also maybe just along this line of questioning, in the prepared remarks you highlighted that you reduced prices and sizes of homes to a degree over, and I don't know if that was specific to the quarter, or just more broadly over the last several quarters. But we'd love to get a little more clarity around that comment, and maybe just more broadly, obviously, we can see the closing ASP and backlog ASP, but just kind of curious, obviously, there's a mix that impacts those numbers. Maybe just give us a sense of percent of homes that you've either lowered or reduced prices, and by how much? By contrast, if there's been a percent of homes or communities that where you've raised prices or sizes and how to think about the ASP for the business going forward into 2025?

Yes, it's a lot there in that question, Mike. So in total, our average house size is down about 2% from a year ago and about flat sequentially. And you're right, that is a mixed reflection of what our operators are choosing to start in a given community and the communities that they're planning to come online. And we might be moving to a few more town home communities to try to meet affordability targets for a given sub-market. With regard to pricing increases or price decreases, that's occurring very much week to week at a community level by our operators as they're gauging their market demand, their inventory conditions, and their future lot supply. So we feel really good about those teams making the right decision, and we really don't aggregate up and say we had 14% of the communities make a price increase, 20% a decrease, everybody else was flat, we just don't look at those numbers at a high level here. We tend to look at are we turning our housing inventory and are we driving returns community by community the best we can.

Great, thanks a lot.

Thank you. The next question is coming from Matthew Bouley from Barclays. Matthew, your line is live.

Good morning, everyone. Thanks for taking the questions. I wanted to go back to the comment around finished spec. I think you were clear that you were intentionally selling homes later in the construction cycle for a lot of obvious reasons. But obviously the number of finished spec did rise sequentially. Your starts did come down sequentially. I'm trying to understand if there is any kind of signal we should take from that around sort of the state of demand and with finished spec being higher, is there an implication to how we should think about margins going forward to the extent you have to clear some of that with either incentives or price? Thank you.

Yes, Matthew. I think that some of that, what you've seen is increase in completed specs as we have seen consistent improvement in our cycle times. So those homes are moving through the construction at a faster pace, which means they're reaching completion sooner. So even though we may still be selling those homes later in the construction process, it now allows us to sell them with a closer certainty. So we'll cycle through that. We don't worry a lot about how many of them exactly as a percentage are completed. As Jessica pointed out earlier, it's more focused on are they sitting once they reach completion. So as they age, that tends to be an indicator that we've seen slower absorption or demand community by community. So we're focused on maintaining housing inventory levels that we need in each community. And we're going to moderate that with starts either increase or pullback based on demand, assuming we have lots in front of us that we need to continue the pace that we're looking for. We're very comfortable with the housing inventory that we have. We don't have a buildup of aged inventory and feel good about that going into the fourth quarter.

Got it. Okay, that's very clear, Paul. Thanks for that. Secondly, I noticed, you mentioned earlier in the quarter that stick and brick were down -- costs were down sequentially on a per square foot basis. I'm curious as we think about that fourth quarter margin guide of flat sequentially, I mean is the expectation that stick and brick is continuing to come down further into the next quarter? And I guess what specifically in terms of construction costs are you actually able to press down on? Thank you.

I think we're looking for effectively flat stick and brick cost. We've gotten a lot of the tailwind out of the lumbered price decreases coming through and I think we're coming to a more consistent level there. The balance of our stick and brick costs, we're probably seeing some pressing for increases, some that we're able to make some progress with in various markets as start have pulled back, people have come looking for work, it may be a little bit sharper pencil coming in trying to get the next neighborhood or the next phase of starts. So we expect some flat stick and brick will probably see an escalation in the lot cost going forward into the fourth quarter. And then, the ultimate margin is going to determine based upon what the concession levels are like in the fourth quarter. And since a significant portion of our closings in the fourth quarter will be sold in that quarter, north of 40%. That will heavily drive the ultimate margin. That's why we felt very comfortable looking at a flat margin environment Q3 to Q4.

All right. Thanks, everyone. Good luck.

Thank you. The next question is coming from Alan Ratner from Zelman. Alan, your line is live.

Hey guys. Good morning. And I also share my condolences to you and to D.R.’s family on his passing of the quarter. So thank you for all the great info so far. We've heard from some other builders and also just other consumer facing companies about some deterioration, I guess, in the credit quality of the consumer recently over the last handful of months, we've seen savings rates on the decline. You guys have done a fantastic job keeping your price point low when you walk through all the drivers of that, but I'm just curious if you can provide some insight into what you are seeing from the consumer today in terms of their ability to qualify, funds for down payment, credit card debt, etc. Any color there would be great.

Well, with our can rate still being around 18%, we feel very comfortable about the buyers that are making their way into our sales offices and their ability to qualify. A historical cancellation rate for us would be high teens to low 20s. And so we're at the low end actually of a comfortable cancellation rate. On what we closed this quarter, a very strong FICO at 725 I think for the second quarter consistently. The only noticeable difference in terms of the buyers that were ultimately selling and closing to is that their average income has, of course, unfortunately had to continue to rise because of the interest rate environment today. So on a household income basis, we were at roughly, I think it was the first quarter, it rounded up to $100,000. $99.9 is the average household income on the buyers who utilize our mortgage company and closed in a home in the third quarter. And so, that's really the only noticeable difference is that, buyers coming into our sales offices today do have to have higher income to be able to qualify. But in terms of what we're selling and closing, no noticeable deterioration in those credit metrics. Everything has been very stable.

That's great to hear. Appreciate that, Jessica. And second, a really positive commentary on the cash flow and capital allocation. I think that that's going to certainly excite investors. If I look at your last several years, you've been buying back around 3% of your shares each year, or at least reducing your share count by that amount. Some other builders have been a bit higher than that. It certainly sounds like you're looking to take that a bit higher here. Is there a target you could give us just to think about where that can go on an annualized basis, could you be in the kind of mid to high single digit range? I know you have the authorization in place, but it doesn't really give us a lot of insight into kind of what timing you expect to utilize that.

Yes, it does not have an expiration date. Our last authorization was issued in our first quarter, so that one lasted about nine months. Typically, they've been in the 12-month range, but we're not providing specific cash flow or repurchase guidance for 2025 as of yet. As we just commented, we want to go through our budgeting process before we provide that specific guidance. But we do expect that as cash flow does provide a significant increase next year, we will increase our repurchases and dividends proportionately to that. So we do expect it to be a meaningful step up in the level of repurchases. And the reduction in share count will be a function of really where our share price is as well in combination with that, because we're allocating and ultimately we will be in the market, we'll repurchase shares that we're able to get with those dollars. But we would expect the reduction in share count to be greater next year than it has been the last few years.

Understood. Appreciate it. Thanks a lot.

Thank you. The next question is coming from Eric Bosshard from Cleveland Research. Eric, your line is live.

Thanks. Two things. First of all, to circle back to the choppiness on demand relative to the movement in rates. I'm just curious how much of the orders now are using a rate buy-down? And I guess I would have thought with the rate buy-down prevalence, there'd be less visibility and influence on consumers as a result of that. Can you just help me understand that a little bit better?

Yes, we actually saw a slight pick-up in the number of buyers getting the permanent rate buy down, which is the vast majority of what we're offering in the market today. Of the buyers that utilize our mortgage company, it was roughly 77%. I think that translates to about 60% of the overall business, give or take. And that was up slightly from the second quarter and it was up more significantly from a year ago.

I think there's a lot of noise in the marketplace when rates were moving and rates were moving up and that affects I think our perspective buyer behavior as to whether or not they're even going to come into the sales office and talk to us. Once they come into the sales office and they understand what's available to them, they might have had an expectation that I got to make a 7% mortgage rate work in my budget and they come in and we're able to put them in something different at a different monthly payment, it opens our eyes up quite a bit to what's possible. And so, the struggle becomes the traffic patterns. If we get the traffic, we're pretty good at conversion, but sometimes all the headline noise on uninterest rates can depress the traffic.

And then secondly, if Florida has been an important and successful market, sounds like it continues to be both. Curious if you could just dig a little bit more into for us what's going on there in terms of traffic and price sensitivity and what you're doing or what your communities there are doing in response to that that position of business to continue to grow.

Yes, Florida has been an important market to us and we certainly continue to see in migration. People love to live in Florida, want to be there, but affordability is challenged like it is across the country. And so we've seen significant rise in prices in Florida and across the country and with interest rates sticking where they have, it's certainly taxing. And that Jessica spoke to, the real change in buyers is they just need to make a little more to afford homes at a static sales price in a higher interest rate environment. And I think that that's really what we're seeing on the impact of sales in Florida, not so much significant change in traffic and/or basic demand or want. It's a matter of continuing to provide the right house at the right affordable price point that reaches as many people as possible and that's what we continue to strive to do as we position our new communities.

Okay, thank you.

Thank you. The next question is coming from Sam Reid from Wells Fargo. Sam, your line is live.

Awesome, thanks so much. So, wanting to touch on your rental business. One of your bigger competitors is looking to do more in the space, but they're also approaching it from perhaps a less capital intensive standpoint. So first, maybe talk through the implications as more builders enter the rental space or the build to rent space, I guess, I should say. But second, are there opportunities to recapitalize this segment longer term, perhaps run it with more third party capital. It sounds like your rental inventories are right sized for now, but just curious if there's room down the road to rethink the approach to capital structure here? Thanks.

Yes, as we continue to grow in this business, we're continually looking at ways to not only capitalize, but how we want to execute in this space. And I think from a single family for rent basis, we've become more efficient with the capital and how we produce and sell these communities. And I think that's some of what you're seeing in our moderation of growth in the inventory levels that we expect to see consistency of the investment level that we have out there. And so we still see strong demand. We still see an under supply and an ability to meet the demand of what's out there. So it's going to maintain, we're going to continue to be focused on it ourselves and be as efficient as we can with that capital.

That's helpful. And then, switching gears to community count, it gives us double digits still in Q3, if I'm not mistaken, and it's really been strong throughout 2024. I believe in the past you've indicated you expect that growth to slow, and I know you're not providing guidance, obviously, for 2025, but curious if there's a level of community account growth that you'll need to sustain next year in order to hit those market share gain aspirations. Thanks.

Sure, Sam. And the great thing is, the position of strength we're coming from in terms of --even if we grow sub 10%, we're generally growing the size of a top 10 builder and consolidating share regardless. But I think we have tried to get across the point the last couple of quarters that we do believe going forward more of our growth is going to come from community count. Whereas really for most of this cycle outside of the early years it's been coming from increased absorption. So we do recognize that to continue to grow, we're going to continue to need those increased communities. Some of that's come through our increased market count, which has expanded dramatically over the last several years. And we've still got a hit list of quite a few additional markets to enter into. And we're continuing to work on our finished lot position to where we can get those new flags open sooner. I think what we said last quarter does still hold though. Within the next quarter or two, I think our community count is going to moderate. It won't be up double digit, but I think we're hopeful we can continue to maintain it in at least a mid to maybe high single digit increase for some period of time. And then at some point it may not have to grow to mid to high. It may just be a low to mid. As you already kind of indicated though, it's one of the hardest things for us to talk about and get right, because there's so many moving pieces to either bringing on a new community or closing out one in terms of sales pace. So we don't ever give specific guidance, but that's our best estimate as we sit here today.

Well, thanks so much. I'll pass it on.

Thank you. The next question is coming from Anthony Pettinari from Citi. Anthony, your line is live.

Good morning. Can you talk about what lot costs were in the quarter, maybe mix-adjusted? And then, based on the prices for land that you've been buying and expectations for stronger cash in 2025, should we expect a lot cost inflation to maybe kind of normalize a bit in fiscal 2025? Could it kind of go back down to low single digit or mid-single digit or just any thoughts on those lot cost trends?

Yes, we have continued to see increase in our lot cost and slight increases as a percentage of overall revenue. We don't expect to see that moderate significantly. I don't know whether that settles in at high singles, low double digits, but we do expect that to be a headwind for us. As the reality of the cost to put a lot on the ground, we just haven't seen much relief in that. And so, we expect to see a continued decline.

In terms of the specific, since you asked for that on a per square foot basis, as I said on the call, sequentially we were up about 2.5% on a lot cost basis. Year-over-year we were still up low double digit percentage, which would still have some mixed impact that we've continued to talk to in terms of the South Central and Southeast making up a slightly lower percentage of our closings, and those are generally lower lot cost markets. And to kind of give you another data point, we typically talk about in terms of just the percentage of home sales revenue that our lot cost averages, it generally is in a 20% to 25% range pretty consistently. And we're right in the heart of that range today, even with the increased lot cost we've been experiencing.

Got it. That's very helpful. And then just -- 4 Star is obviously a major source of developed lots for you, but putting aside 4 Star, could you just touch on the kind of the health of your land banking pipeline and partners?

Yeah, I wouldn't necessarily refer to it as a land banking pipeline. I'd refer to it as a lot developers pipeline. It's a large collection of very seasoned, experienced land development companies across the country that have had to -- frankly, they've had to look for some different capital sources and we've been able to help them find some other capital sources as a lot of the regional and community banks have pulled back from that sort of lending, but there's been other capital sources willing to step up when the developer is working for somebody like D.R. Horton, that we've been able to keep those folks in business producing lots for us. And 64% of our closings this quarter came on lots developed by someone else besides D.R. Horton, and that's a great part of our business strategy.

Okay, that's very helpful. I'll turn it over.

Thank you. The next question is coming from Buck Horne from Raymond James. Buck, your line is live.

Thank you. Good morning. My question is just a quick one on 4 Star and just if there's an update on the longer-term plan for what to do with 4 Star or is there a thought to eventually recapitalize that so that 4 Star could eventually be deconsolidated?

Yes, 4 Star is a very important part of our strategy with them being separately capitalized. They are able to support their growth with their own capital sources. And so, it does not have any offset on the cash available for the parent company and our shareholders. And they're growing their platform. And so, we are working alongside them as they grow their platform. They're now in about 60 markets, I believe, so roughly half of the markets that D.R. Horton is in. So they've still got a lot of opportunities to grow that platform. And so, our focus right now is to continue to work with them as they grow, improve their operations, get as efficient as they can at delivering lots to us and to the industry. And then as they mature, they're raising capital. I would expect them to continue to raise capital over time. And so, as that capital structure ultimately matures, then that will give us the visibility to be able to make the determinations on what we do in terms of our investment. And so, obviously, we made an additional investment to buy majority stake and we have not contributed or needed to contribute any additional capital to 4 Star and don't expect that we will need to going forward. But there will be an opportunity at some point down the line to look at their capitalization when they're at a more mature level.

Got it. Got it. That's helpful. I appreciate that. And quickly on the rental operations, in terms of the current inventory balance, it kind of looks like it's about one-third single-family rental, about two-thirds multifamily. Is that the right mix for how you think the inventory is going to track going forward, or do you think at some point, given the amount of multifamily inventory that's out there right now, do you think it shifts more towards the SFR weighting?

I think near-term, our expectation based on the pipeline that we have of deals is the weighting towards multifamilies probably a little bit higher in the near term, the next few quarters. Over the long term, I would expect that to balance out a little bit more than where it is today as FSR picks back up. But near term, probably a little bit heavier multifamily.

Okay. Is like 50-50 the right optimal balance kind of where you'd like to get it to?

We don't have a set level necessarily. It's whatever the market demand is and whatever we believe the best mix is for returns community by community across our markets.

Got it. Thank you.

Thank you. The next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live.

Thank you. Good morning, everyone. My first question is, you mentioned that the cycle times have actually moved below your normalized levels historically. Can you talk about where you saw that improvement come from? And how sustainable do you think that is, especially if we do see a world where perhaps rates come down and activity picks up on a relative basis?

Yes, we've seen that mostly from -- we don't really have supply chain challenges. That has largely healed and we have the parts and pieces we need to build. And labor has strengthened. We've seen -- with our consistent production and market scale, we have the labor that we need and job site maintenance and controls and efficiency, just all of that kind of coming together. And that's where you've seen our cycle times drop a little bit below our historical norms. We continue to focus on being more efficient with the construction process and something we're focused on every day.

Okay. That's helpful. And then perhaps turning to the M&A environment. Can you talk a bit about what you're seeing there? Has anything changed in how that pipeline is looking today?

We still prefer small tuck-in acquisitions. We like things that will either expand our footprint in a new and emerging geography, where we can acquire some people along with the lot position in other places. It becomes oftentimes a homes and construction, finished lot [indiscernible]. And then we were able to work with the selling principle to stay in the business as a lot entitler and developer. And that's been a very successful strategy for us in creating a lot development partners around the country as well. Still see good flow of deals to look at, but I would say we're pretty selective on what we're willing to do right now.

Okay. All right. Thank you for the color, and good luck with everything.

Thank you.

Thank you. The next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live.

Hi, good morning. Thanks for taking my questions and I'll add my condolences on D.R. Just going back to your earlier comments on price and pace and then targeting market share gains for 2025. If I look at your starts in the quarter, they're down -- they're tracking down year-over-year. The census single family starts are up 7% quarter-over-quarter in the second quarter. Your margin was higher though. Has there been a strategy shift at all? Why not incentivize or push orders more at this gross margin level? And then my second question would be, how do we think about the start to pace going forward relative to your plan for market share gains?

Yes, no change in strategy, Rafe. We are seeing efficiencies in our operation, which is why you've seen a little lower start pace than maybe might have been expected. But as we continue to move through this market, we're going to have to see some improvement in the overall, or increase, I guess, if you will, in the overall starts pace to keep pace with our growth goals. But it's really just us managing our inventory, making sure we have that we need community by community to hit the price and pace goals that we're looking for. And we'll manage that inventory based on our ability to get those homes moved through the construction process and based on availability of lot, community by community in front of us.

Thank you. And then just on the -- for the fourth quarter gross margin guidance, a flat quarter-over-quarter, it sounds like you're expecting net price to be flatish with incentives. You talked about stick and brick being flatish and then land is up. What is -- is there another piece in there that's going to be giving you relief on the cost side, like what's happening with broker, commission, or mix to get to that flat quarter-over-quarter?

As we look -- as we're going into the quarter here, obviously, we've had some rate volatility. We did see sequential ASP growth, and so there's probably a little bit of price. We saw a little bit of our cost of our incentives go down sequentially this quarter, so there's probably a little bit of an assumption, a little bit of price, a little bit of incentive cost reduction in the quarter to offset the lot cost increase.

Great. Thank you.

Thank you. The next question will be from Mike Dahl from RBC Capital Markets. Mike, your line is live.

Thanks for squeezing in. Just to follow up on Rafe's question about kind of the price versus pace, sorry to hit it again, but I guess from a more near-term standpoint was the decision to not lean in more heavily on incentives because at the time there was rate volatility, you didn't -- your perception was that there just wouldn't be a sufficient demand response or anything else you can give as far as just during the quarter. It did sound like you kind of made a decision not to push more aggressively.

We aren't making that decision here on a broad scale. I wish we were good enough to know which way rates were going to go. But we rely on our operators at a community level to make those decisions based on the traffic volume that they have and the sales demand and the people and buyers that they have in front of them on a daily basis. And I think, overall, what that resulted in is a solid margin for us and sales that seasonally didn't increase maybe like they would, but we're in a good place with the sales pace that we achieved in the quarter and the inventory we have to hit our guidance for the year.

Got it, got it. Okay. And then on the rental business, just specifically on the fourth quarter, obviously, the last three quarters, it's been a volatile environment to sell either SFR or multifamily. Can you talk more specifically about what your expectations are for fourth quarter for the rental platform?

Yes, the rental is baked into our consolidated revenue guide and there is uncertainty around timing of closings of rental deals. So there's a little bit of lumpiness in those numbers, but that's built into the range that we're providing in a revenue guide, but no other specific guidance on the Q4 revenues from rental.

Okay. All right.

Thank you. This does conclude our Q&A session today. I would like to hand the call back to Paul Romanowski for closing remarks.

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results in October. Congratulations to the entire D.R. Horton family on producing a solid third quarter. We are honored to represent you on this call and greatly appreciate all that you do.

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