霍頓房屋 (DHI) 2021 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2021 Earnings Conference Call for D.R. Horton, America's Builder, the largest builder in the United States. (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, Christine, and good morning. Welcome to our call to discuss our results for the first quarter of fiscal 2021. 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 which is 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 in the next day or 2. 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'm 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.

The D.R. Horton team delivered an outstanding first quarter, which included a 98% increase in consolidated pretax income to over $1 billion, a 48% increase in revenues to $5.9 billion, and a 56% increase in net sales orders to 20,418. Our pretax profit margin for the quarter improved 440 basis points to 17.4%, while our earnings increased 84% to $2.14 per diluted share. Our homebuilding return on inventory for the trailing 12 months ended December 31 was 28%, and our consolidated return on equity for the same period was 24.4%. These results reflect the strength of our homebuilding and financial services teams, our ability to leverage D.R. Horton scale across our broad geographic footprint, and our product positioning to offer homes at affordable price points across multiple brands. Housing market conditions remain very strong, and our teams are focused on maximizing returns and improving capital efficiency in each of our communities while increasing our market share.

However, we remain cautious regarding the impact of COVID-19 pandemic or other external factors may have on the economy and our operations in the future. We believe our strong balance sheet, liquidity and experienced teams 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 home blending operations and managing our product offering, incentives, home prices, sales pace and inventory levels to optimize the return on our inventory investments. With 42,100 homes in inventory, an ample supply of lots and continued strong sales trends in January, we are well positioned for the spring selling season and the remainder of 2021.

Mike?

Earnings for the first quarter of fiscal 2021 increased 84% to $2.14 per diluted share compared to $1.16 per share in the prior year quarter. Net income for the quarter increased 84% to $792 million compared to $431 million. Our first quarter home sales revenues increased 48% to $5.7 billion on 18,739 homes closed, up from $3.9 billion on 12,959 homes closed in the prior year.

Our average closing price for the quarter was up 2% from the prior year at $304,100, and the average size of our homes closed was down 2%, reflecting our ongoing efforts to keep our homes affordable.

Bill?

Net sales orders in the first quarter increased 56% to 20,418 homes, and the value of those orders was $6.4 billion, up 62% from $3.9 billion in the prior year. We sold 7,292 more homes this quarter than the same quarter last year, supporting our plan to achieve further gains in market share and scale during fiscal 2021. Our average number of active selling communities increased 3% from the prior year quarter and was up 1% sequentially. Our average sales price on net sales orders in the first quarter was $314,200, up 4% from the prior year. The cancellation rate for the first quarter was 18%, down from 20% in the prior year quarter. We are pleased with our sales pace to date in January, and have seen the volume improvement we expect as we head into the spring selling season. We remain well positioned for increased demand with our affordable product offerings, lot supply and housing inventories.

Jessica?

Our gross profit margin on home sales revenue in the first quarter was 24.1%, up 140 basis points sequentially from the September quarter and up 310 basis points compared to the prior year quarter. The sequential increase in our gross margin from September to December exceeded our expectations and reflects the broad strength of the housing market across almost all of our markets. We continue to see very strong demand and a limited supply of homes, especially at affordable price points, and we still have pricing power and are currently using very few sales incentives.

On a per square foot basis, our revenues were up 4% from the prior year quarter, while our stick and brick cost per square foot was down 1.5%, and our lot cost per square foot was up 4%. Sequentially, our revenues were flat on a per square foot basis, while our stick and brick cost per square foot decreased 1.5%, and our lot cost decreased 1.5%. Although we didn't see the impact of rising costs in our December quarter, we do expect both our construction and lot costs will increase on a per square foot basis in our homes closed next quarter.

With the strength of today's market conditions, we expect to offset these cost pressures with price increases, and currently expect our home sales gross margin in the second quarter to be similar to the first quarter. We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.

Bill?

In the first quarter, homebuilding SG&A expense as a percentage of revenues was 7.9%, down 130 basis points from 9.2% in the prior year quarter. The improvement in our SG&A ratio this quarter was better than our expectations, and was due to strong leverage driven by our higher-than-expected volume of homes closed and the increase in our average selling price. Our homebuilding SG&A expense as a percentage of revenues is at its lowest point for our first quarter in our history, and we remain focused on controlling our SG&A while ensuring that our infrastructure appropriately supports our business.

Mike?

We ended the first quarter with 42,100 homes in inventory. 16,300 of our total homes were unsold, of which 1,600 were completed. We also had 1,900 model homes at the end of the quarter. Due to our strong sales in the second half of fiscal 2020 and the first quarter of fiscal 2021, our level of unsold and completed unsold homes is lower than in recent years. We have accelerated our pace of home starts across most of our communities in the past few quarters to ensure we maintain an adequate number of homes to meet demand. During the first quarter, we started 22,800 homes. We have made good progress increasing our homes in inventory, and we expect to increase them further in the second quarter as we enter the spring selling season.

At December 31, our homebuilding lot position consisted of approximately 441,000 lots, of which 28% were owned and 72% were controlled through purchase contracts. 30% of our total owned lots are finished, and at least 47% of our controlled lots are or will be finished when we purchase them. Our growing and capital-efficient lot portfolio continues to provide us a strong competitive position, allowing us to start construction on more homes to meet homebuyer demand.

David?

For first quarter, homebuilding investments in lots, land and development totaled $1.95 billion, of which $1.13 billion was for finished lots, $490 million was for land development and $330 million was to acquire land. $290 million of our lot purchases in the first quarter were for Forestar. Bill?

Forestar, our majority owned subsidiary, is a publicly traded residential lot manufacturer operating in 51 markets across 21 states. Our strategic relationship with Forestar has 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 and now expects to grow its lot deliveries by 30% to 35% in fiscal 2021 to a range of 13,500 to 14,000 lots.

At December 31, Forestar's lot position increased 74% from a year ago to 77,500 lots, of which 52,300 are owned and 25,200 are controlled through purchase contracts. 67% 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 $580 million of liquidity which includes $240 million of unrestricted cash and $340 million of available capacity on its revolving credit facility. At December 31, Forestar's net debt-to-capital ratio was 31.8%, 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 grow their business and navigate through changing market conditions. Jessica?

Financial services pretax income in the first quarter was $84.1 million with a pretax profit margin of 44.9% compared to $30.5 million and 29.6% in the prior year quarter. 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 last year because of lower valuations offered by mortgage servicers due to the uncertainty of the impact of the CARES Act. Servicing values have since improved, and we sold a portion of our retained servicing rights during the first quarter. We expect to continue retaining some servicing rights prior to selling them to third parties, typically within 6 months of loan origination.

For the quarter, 97% of our mortgage company's loan originations related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 68% 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 and an average loan-to-value ratio of 90%. First-time homebuyers represented 56% of the closings handled by our mortgage company, up from 50% in the prior year quarter. Mike?

At December 31, our multifamily rental operations had 4 projects under active construction and an additional 4 projects that are in the lease-up phase. These 8 projects represent 2,325 multifamily units. Based on our pace of leasing activity, we currently expect to sell 2 projects during the second half of fiscal 2021. Our multifamily rental assets totaled $294.3 million at December 31. And as we mentioned on our last call, we are constructing and leasing homes within single-family rental communities. After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is expected to be marketed for sale. Our single-family rental operations are currently reported in our homebuilding segment.

During the quarter ended December 31, we completed our first sale of a single-family rental community representing 124 homes for $31.8 million, resulting in a gain on sale of $14 million. We currently expect 1 more sale of a single-family rental community later this fiscal year. At December 31, our homebuilding fixed assets included $106.6 million of assets related to our single-family rental platform, representing 13 communities totaling 890 single-family rental homes and owned finished lots. We still expect our total investments in our single and multifamily rental platforms to more than double during fiscal 2021. Bill?

Our balanced capital approach focuses on being disciplined, flexible and opportunistic. During the 3 months ended December, our cash used in homebuilding operations was $269.2 million compared to $178.4 million in the prior year period. At December 31, we had $3.9 billion of homebuilding liquidity consisting of $2.1 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities. 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 to changing market conditions.

During the quarter, we issued $500 million of 1.4% senior notes due in 2027, and we repaid $400 million of 2.55% senior notes at their maturity. Our homebuilding leverage was 17.3% at the end of December with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months.

At December 31, our stockholders' equity was $12.5 billion, and book value per share was $34.33, up 23% from a year ago. For the trailing 12 months into December, our return on equity was 24.4% compared to 18.2% a year ago. During the quarter, we paid cash dividends of $73 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in February. We repurchased 1 million shares of common stock for $69.8 million during the quarter and our remaining outstanding share repurchase authorization at December 31 was $466 million. Jessica?

In the second quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $6 billion to $6.2 billion and our homes closed to be in a range between 19,000 and 19,500 homes. We expect our home sales gross margin in the second quarter to be similar to the first quarter and our homebuilding SG&A as a percentage of revenues in the second quarter to be approximately the same as the first quarter. We anticipate a financial services pretax profit margin in the second quarter of 40% to 45%, and we expect our income tax rate to be in the range of 23% to 23.5%. For the full fiscal year of 2021, we now expect consolidated revenues of $25.2 billion to $25.8 billion and to close between 80,000 and 82,000 homes.

We expect to generate positive cash flow from our homebuilding operations in fiscal 2021. However, we are not providing specific guidance for our homebuilding cash flow this year, as we prioritize augmenting our housing and land and lot inventories to support higher demand. After reinvesting in our homebuilding business, our cash flow priorities include increasing our investment in both our multi and single-family rental platforms, maintaining our conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to keep our outstanding share count flat year-over-year. David?

In closing, our results reflect the strength of our experienced operational teams, industry-leading market share, broad geographic footprint and diverse product offerings 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 efforts during this time have been remarkable. We are proud of your work ethic and your positive spirit as you continue safely helping our customers close on their much anticipated new homes.

This concludes our prepared remarks. We will now host the questions.

(Operator Instructions) Our first question comes from the line of Carl Reichardt with BTIG.

I wanted to talk a little about your underlying costs. Thanks for the info on stick and brick and land. Can you talk a little bit about what you're seeing in the labor market, David? We're starting to hear a little more -- a few builders starting to say things are easing some, others are telling us things are tougher. And oftentimes, you'd like to talk about specific trades, specific markets. But I'm interested just broadly, what your expectations are for the labor shortage beginning to ease or tighten in 2021?

I don't see it being much different than it's been in 2020, at least not for us. We set up and try to drive our communities in the most efficient way, making it the easiest possible way we can for our trades to get in, get out, get their job done. We've actually, I think, through this cycle, have been focused on the labor side and have created a lot of efficiency and have expanded our trade base just by making it easier for them to get in, get out and know what they're doing. '21, our volume is ramping up. I think that's going to continue to be a challenge. But we feel very good. I mean we wouldn't be selling houses if we couldn't build them. So...

Fair enough. And then I wanted to ask a little bit about the West region, which -- the growth is slower than the really significant growth you're seeing in other places, and inventory is down sequentially as well. In the meantime, South Central, you took more order dollars this quarter than you did last quarter. So I'm curious if you're thinking about shifting capital investment among the different regions as you look into '21 and beyond. Is there a deemphasis happening in the West? Or is the -- this loan is just a function of being out of product and out of communities?

The underwriting in the West is much more difficult, time lines are longer. So through this cycle, our community count has continued to slip down there. I will tell you, we have one of the best groups of people in the company in the West region. When we talk about platform, we talk about people, product price. And we are certainly -- have a very strong platform at West. When the returns in Texas, Florida, Carolinas have been incredible, and everybody competes for capital in this company. So I will say that West is an area that I personally am going to emphasize this year. And I think you'll see the growth return there.

Carl, for reference, it will be posted after the call, but our West region community count was down 9% year-over-year and 10% sequentially, which compares to the company average, which was actually slightly up in both periods.

Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch.

The first one, just on the NAHB had noted that builder respondents were growing more markets, certain with affordability, with home price appreciation and also with rates sort of grinding higher. And maybe not specific to D.R. Horton, but for the industry, I mean, how are you guys thinking about this dynamic? And do you see any risk to industry-wide demand as the spring approaches here?

John, this is Mike. We're always focused on affordability. That's something that's consistent across the platform. And I'm not as well versed to speak to the industry. But in our communities, we're focused on providing the value at whatever price point we're at. And so whether we have buyers moving up from their current housing situation to a D.R. Horton home or they're a first-time homebuyer with 56% of our buyers in the quarter were first-time homebuyers. We're focused on providing an affordable home for that buyer that fits in their monthly budget.

We continue to see healthy credit metrics across that buyer group. Our FICO score was 719 this quarter. I think on our Express brand stand-alone, it was almost 710. And then as we also mentioned on the call, our average square footage has continued to tick down slightly on a year-over-year basis as home prices have risen. But what we typically see is for some buyers want to buy as much home as they can get for their money, and they're buying out of need, not a discretionary purchase. And so if home prices have risen, they just buy a little bit less house.

Yes, that makes a lot of sense. And then how are you guys thinking about the potential for increased environmental regulations under a body of administration? And what this could mean for land development costs and time lines, things of that nature?

Well, I don't think it's going to help affordability, and I believe it's going to extend time. We're well positioned with only control over 400,000 lots. Again, we're going to focus on affordability. And as regulations increase, it's going to become more challenging. But given our position, our people, I think we're -- we can meet that challenge.

Your next question comes from the line of Stephen Kim with Evercore.

It's interesting at the way sometimes the builders are trade, it makes it seem like people think you're just the beneficiary of good luck. But I'm reminded about that statement, luck is what happens when preparation meets opportunity. And you guys have done a great job over the last couple of years preparing for this situation. And so I wanted to ask you about your comment as to capital allocation. Because you indicated there that you are wanting to carry higher cash levels than normal for the foreseeable future. I think you made reference to some uncertainty in the current environment. But arguably, homebuilding is always difficult to predict. And so I'm curious, what is a good rule of thumb for modeling your cash levels going forward? And what are the kind of things that you're looking to fade or dissipate in order to pave the way for you to hold lower cash levels than that?

Sure. Good question, Steve. Just to get to the point in terms of the expected levels, we would expect at each quarter end to maintain at least $1 billion of homebuilding cash, but would expect most quarters to see between $1.5 billion and $2 billion. I would say the primary driver behind that shift over the last year is we've been building a little bit more. It's just a significant increase in volume and scale and activity, which feel like it's prudent to ensure that we have sufficient cushion to manage significant sudden changes in the business to avoid having any potential liquidity crunches. That just gives us that much more flexibility to respond when we see opportunities in the market.

And so we've seen a number of significant shifts in our business over the last few years from a sharp increase in interest rates, which decreased demand in late '18 to the pandemic disruption in the spring of 2020 to then the very significant increase in demand that we saw in the summer of 2020 and ever since. And so from that standpoint, having a bit more cushion, a bit more liquidity to respond, whichever direction we need to go in the business, we just feel like it's prudent. I don't see us changing that strategy. I think that just puts us in a very strong and flexible position to respond to market changes.

Okay. Yes. Certainly sounds like we ought to be modeling that on a longer-term basis. Okay. Second question relates to the pretty awesome margins you all reported this quarter. And I think you just gave guidance as to that margin fairly recently. And so I think a lot of folks are just curious as to what drove the upside in your margin this quarter. And paying note to the fact that your guidance for the March quarter suggest that it's more than just a temporary spike, I personally think you're still being conservative. But I'd love to hear what drove the upside surprise in this quarter?

Well Steve, I'd say the first thing we expected to see this quarter that we did not as we've been seeing cost increases coming into our business over the last quarter or 2, and we expected to see a bit more of that come through in our closings in Q1, which we did not. That's still coming. We can see it coming through our backlog, and we expect to see some of those cost increases start to hit our margins in the coming quarters. That being said, we still have a very strong environment, obviously, with the ability to raise prices, very low incentive levels. And so we do expect at this point now with that additional visibility of another quarter to be able to maintain the current margins that we're showing, which obviously are at very strong levels.

We've really had price protection on the entire cycle on the material front. And we've seen very neutral impact from materials other than a little bit of headwind from lumber last year. Lumber is starting to tick back up. So that's going into our commentary as well. But really, it's a function of home prices have risen significantly and building product companies have cost inflation as well. And so we are experiencing some increases in material costs that we didn't see, as we said, flow through in the December quarter. But we do expect those to start flowing through in the rest of the year.

And I'll just add, our operational teams are doing a great job at controlling costs, where we see increases, we look for efficiencies to reduce costs. And I mean, to be honest, I think we were a little bit surprised as stick and brick per foot actually went down last quarter. That's just a phenomenal job by our people.

And our next question comes from the line of Matthew Bouley with Barclays.

Congrats on the quarter. I wanted to ask about the lot position of 441,000, I think you said. It really suggests a material addition during the quarter. I guess, number one, could you speak at a higher level, just around what that signals around your view of the sustainability of housing demand? And number two, just the color around the lots you added during the quarter, kind of duration of those lots, lot inflation, if any of that could actually impact 2021?

Sure. And Matt, you'll notice that most of that addition to the lot position did come in the form of option lots. We continue to significantly increase our option lot position. We had noted on our last call that we do expect our own lot to increase modestly, and they did kind of get back to a normal level there. But we've been on an ongoing effort to expand our relationships with developers across the country. Of course, our relationship with Forestar continues to bear fruit as well. So a significant portion of the additions to our lot position through options came from our third-party developers and our relationship with Forestar.

And with the significant growth we've seen in demand and significant volume increases that we've seen, that we certainly want to make sure we stay in position to maintain. We probably have stepped up our efforts to ensure that we're keeping our pipeline sufficiently out in front of us with the volume we're seeing today.

The volume we see today, Matt, as well as looking forward to more medium term, we just don't see a lot of overbuilding, a lot of excess supply in the marketplace relative to household formation demand. And so we want to maintain, as Bill said, adequate support of inventory for that medium-term land. So that's why you're seeing our controlled lot position increased.

And the fact that we're still heavy option does allow us to be a little more aggressive in tying things up. So it's, again, positioning for the future.

Very capital-efficient with the options.

Okay. Got it. That's very helpful color. Second one, I wanted to ask about ASPs. I think, Bill, you might have mentioned -- or I think you said the order ASPs of $314,000. I think the backlog ASP is right there as well. So I'm just curious, number one, like-for-like versus mix, if that's just perhaps Emerald getting a lot better. But then number two, if I look at the closings and revenue guidance for the year, it seems to suggest that the closing ASPs settled back down a little bit. I'm just wondering if you can reconcile that and just how to think about closing ASPs for the year.

Sure. We always see a higher ASP in our backlog than we do in our sales and our closings because higher-priced homes generally are bigger and take longer to work their way through. So that's not necessarily unusual. But yes, so with our sales ASP being at $314,00 this quarter, that's definitely showing a continuation of some price appreciation. And so in the near term, we would expect, I think, to probably still see some potential upside.

That being said, our operators and our teams and our people are very focused on providing affordability. And so we're going to keep an eye on the price points and the payments that our buyers need to have to afford to move into our homes. And so we never plan for significant price appreciation beyond a quarter or 2. Because we always know that at some point, we will make some adjustments in our operations to make sure we keep our price points affordable.

And our ASP per square foot on a year-over-year basis was up 4%. But sequentially, it was actually flat.

And so the guidance doesn't reflect quite all of our price. It doesn't reflect quite all of that price. It reflects that we would still continue to manage very closely on the affordability.

Our next question comes from the line of Eric Bosshard with Cleveland Research.

The increased delivery number for the year, curious what changed and where that changed? And thinking a bit of geography and mix and also the production pace. But just sort of the things that changed that have resulted in you take a little bit more optimistic on full year deliveries.

I think we've seen consistently strong demand across our footprint, Eric. In addition, as we've gotten the starts up in the first quarter, we started almost 23,000 homes with good visibility to start for the next couple of quarters. And so that gives us more confidence in the number we can deliver for the full year. So just a little clear -- a little more of the year coming into focus with what we're going to be able to accomplish.

We're also seeing a good start to the spring and January, which, again, it's about confidence. And we don't want to put a number out there that we don't feel really good about. So we feel really good about that number.

From a production pace and inventory pace, anything different that you're doing there or have done there to also allow you to get more homes produced?

Anything different? It's -- we talk about sustainability and growing the scale of our platform and doing it in a measured approach that allows us to hang on to those increases. So I wouldn't say it's anything different. It's just further execution of the same strategy of growing our capacity for production, growing our market share market by market. And that's what our teams think about every day when they're getting up and going about their jobs is how I get a little better today and grab a little more production capacity in my marketplace.

Our next question comes from the line of Alan Ratner with Zelman & Associates.

Congrats on the great results. My first question, I was hoping to drill in a bit more on the land side, follow-up to Matt's question earlier. If I'm just kind of looking at the growth in your lot book and obviously account for all the closings you've had over the last year, it looks like over 40% of your current lot booked or lots controlled have actually been tied up over the last 12 months since the pandemic began. And I'm curious, we hear from a lot of builders, when we underwrite land, we assume today's absorptions, today's pricing. And obviously, the current environment makes that a little bit tricky because your margins and your absorptions are at cycle highs. So I'm curious, as you look at the composition of the land you've tied up over the last 12 months, could you talk a little bit about how you're thinking about underwriting to gross margin, to return on inventory, to absorptions, whatever metrics you guys think about internally? And how that compares to where you're generating business today?

Our underwriting really hasn't changed much. As we've seen absorptions increase, it does -- when we're requiring a 2-year cash back at a 10 a month absorption, you can buy more lots than you can a 5 a month absorption. So we have seen the scale of the deals get a little bigger, but the position that -- from a pricing and location standpoint, I don't see that we've given up much in the deals we're doing today versus the deals we were doing 2 or 3, 4 years ago. Scale is bigger. The phase sizes are bigger. Lot prices have been pretty stable.

And like I said this on the last call when I'm traveling and looking at deals. The deals that we put on the books this quarter were better than most of the deals that we had on the books. So it's very -- it gives me a lot of confidence, and our guys are doing a great job. So I don't see deterioration in our lot position from a marketability or really even a pricing standpoint.

Got it. That's helpful color. Second question on the closing guidance for the year. I just want to maybe get a little bit more commentary there. So if I look at your 2Q guide, your closings are going to be up just under 40% through the first half of the year. And for the full year guide, the midpoint, I think, is a 24% increase, which obviously is incredibly strong. But I'm just curious, what's driving that deceleration in the back half? Because your backlog is going to be a very strong -- strongly. So is this a function of conservatism around cycle times and just the backlog conversions might be a bit lower than years past because of how elevated the backlogs are? Or is there something else that's driving may be that you sell in the back half?

It's really the stage of construction our homes are in, Alan. We have a lot fewer completed specs today than we typically have. And as a result, we're selling and closing fewer homes intra-quarter than we typically would. I think this quarter, that was in the 20 -- mid-20% range. And typically, it's in the high 30s or 40% range. So it's really just a function of the stage of our inventory. And we did get, as Mike said, almost 23,000 homes started this quarter, but a lot of those are still in their early stages of construction. And so a lot of the homes that we'll be starting here a little bit later in the year won't be available for this fiscal year, but they'll put us in a very good position to continue growth in fiscal 2022.

And when you look, obviously, at the year-over-year increases, we started to see some very significant year-over-year increases in Q3. Last year's Q3 and Q4 were much more significant. So the year-over-year increases going forward are naturally not going to necessarily continue at the same pace they are right now. But we're still expecting a very strong year -- a very strong year-over-year increase for fiscal '21.

Our next question comes from the line of Michael Rehaut with JPMorgan.

Congrats on the results. First question, I kind of wanted to ask about the underwriting and the gross margins, maybe from another angle and apologies if maybe I'm beating a dead horse here. But with the gross margins at 24%, obviously, that's -- you almost have a very good problem to deal with in kind of keeping those margins extensively to the extent possible at these levels, which are kind of rarefied air for you historically. You mentioned earlier that you haven't seen much appreciation in lot prices, lots prices being pretty stable, and the deal flow is pretty attractive right now.

But if home price appreciation were to moderate obviously, today, it's in a, let's call it, a high single-digit type of year-over-year dynamic on a same-store basis. If that were to moderate more to like a low single-digit rate, given where you're underwriting the deals to today, should we expect that gross margin to come in a little bit over the next couple of years? Is that the right way to think about it? Or are there other factors that maybe we're not appreciating?

We really have no insight to gross margin in the next few years. I mean gross margin really is a function of the market, Mike. We're focused on underwritings to returns. And although we don't see it right now, even if we did see a compression in our gross margins for whatever reason, affordability, interest rate, something that we don't foresee today as an issue, we can still generate very attractive returns on our current land bank with the efficiencies that David's kind of already talked to in our business today and our ability to keep turning our houses.

But we feel very comfortable with our current lot position that we are going to be able to offset costs going forward and hopefully hang in around this 24% range. But really further than a quarter out, we don't have a whole lot of visibility because we do turn our houses much more quickly, I think, than the industry by and large. And so we have the best early read on cost and gross margin in the market.

Can't emphasize enough that gross margin is not part of our underwriting hurdles. Returns is our underwriting hurdle. And certainly, higher gross margins can generate higher returns. But we focus, first and foremost, on hitting returns, hitting our absorptions in each community. And then the market, sometimes will give you more margin than you may have underwritten.

If you look at our average sales price, we are significantly more affordable than most of our peers in the homebuilding space. And our land portfolio and our operating structures are designed and geared to drive that affordability. So are we -- when I look at the competitive makeup out there, both of the resale market, which is really, today, our primary competitor at this price points. And our peers in the industry, it's -- I mean we feel very good about our current position, which allows us to underwrite and execute the positions that we believe will keep us in this range.

Right. No, I appreciate it. I guess, secondly, I just wanted to zero in on SG&A for a moment. The results were significantly better than what you were looking for, I think, by order of about 100 basis points, yet your closings were only modestly above guidance. So I was wondering, you had mentioned leverage off of the strong volume, but you really had instead of 40 basis points, 140 basis points of year-over-year leverage.

And additionally, you're expecting SG&A ratio to be flat sequentially versus historically, a little bit better. So just wondering if there was anything specific to the first quarter, and I apologize if I missed this earlier, that benefited this past quarter more on a onetime basis? Or what kind of drove that differential?

Michael, thank you. You touched on part of it. Deliveries were a little bit ahead of what we had guided to in addition to ASP is a little higher, which drives a little more SG&A leverage. Something Jessica touched on before is the lower level of completed inventory, especially the completed specs that were carrying the business today, able to operate the inventory portfolio very efficiently. And that requires less SG&A to maintain and care for those homes while they're sitting completed because we do run those costs through SG&A. So as we have less of those, we had around 5,000 a year ago. And today, we have about 1,600. So that's an improvement and a tailwind as well.

And although we guided to flat SG&A sequentially, on a year-over-year basis, it would actually be approximately 40 basis points of leverage, which is still a pretty nice move. And when we think about it on an annual basis, as our SG&A is already at record lows, we're not going to ever just be able to model and say that our SG&A is going to be down more than, say, that on an annual basis. Can we ultimately maybe get there? If we continue to see prices rising, ASP plays a big role in that, sure. But right now, we feel like leveraging our SG&A 40 basis points on a year-over-year basis is a really nice move.

But nothing onetime. Yes, there are some changing conditions and the volume and pricing has helped. But nothing onetime in the quarter.

Our next question comes from the line of Nishchal Sood with UBS.

So first question I just wanted to ask was around demand trends. A lot of folks are wondering demand has been so strong. What's it going to look like when life returns to normal? I mean, clearly, we're far from being back to normal. But in the last quarter, obviously, vaccine news, there's some hope out there. Is there anything you can -- you've seen in terms of the traffic or what folks are looking for, how it's evolving that gives us any insights into how your home buyers are looking at things?

The demand out there, I think, is really driven by demographics, and I think it has been accelerated because of the pandemic and people's desire to become -- or to find a safe environment for their family. I really don't see that demand issue changing. I mean, it's -- it accelerates. It's a long-term program, and it got accelerated. Now that's going to stay. So I mean we are positioning. We are driving to take advantage of as much of that demand as we can. And it's -- I mean, right now, today, it's very good out there.

A lot of our floor plans in issue actually already incorporated flex space. So depending on what a buyer is looking for today, whether it be a home office, a second home office, a learning space for their kids. Those types of things, we've already always had floor plans that can accommodate that. And we can continue to adjust our starts based on what those homebuyers are potentially looking for. And then the things that have always been true are as people start their families and have children, they generally want a backyard for their kids. They want good public schools, maybe a garage for their cars. Those things have kind of always been true that go along with the demographic side of the equation that David was talking to.

So I would say other than the acceleration from the pandemic, and that's being positioned in the right places with a lot of different floor plans to choose from, no significant change on that front.

And still the strongest demand is at the most affordable price.

Yes.

So that's been a trend that we've been seeing for quite a while. Obviously, we're very well positioned to take advantage of that. The environment right now with low interest rates, that's accommodated for that as well. And it's certainly a benefit for that demand as well, which right now, we don't really see that changing much in the near term.

Got you. Got you. Makes sense. So second question I wanted to ask was around your inventory levels. So demand has been so strong. Obviously, folks have ramped up your starts considerably, but still remains -- just looking at a metric like your inventory against your backlog just kind of sizing it, still remains behind where it would be normally. Are we in a market where demand is just so strong, it will be difficult to get back to your normal or targeted levels of inventory? Or do you see, as the year progresses here, there could be some progress on that, even if demand does remain as strong as it has been?

If demand remains at the exact level it is today, it would be very challenging for us to get back to a historical relationship between total inventory and backlog. Demand is that good. We look at our starts capacity neighborhood-by-neighborhood, week-by-week. And we are increasing that capacity over time to make sure it's sustainable, and we're doing it with our trade partners in mind. So -- but while we're doing that, demand continues to expand, to absorb that additional capacity we're putting into the marketplaces today at the price points we're serving.

Really more focused and issue on homes conversion than backlog conversion. I mean backlog is a function of what we're selling, and we're going to sell what's out there from a demand perspective and ultimately, we'll get the house started. We've got the lot positioned to do it unlike anyone else in the industry. We wouldn't be selling the houses if we didn't have the lots. And feel comfortable about our cost structure and what kind of return we were going to generate on those houses. So we're really focused on the houses we have in inventory and how quickly we're turning those and rather than a backlog conversion metric, trying to improve our housing inventory turn. And generally, we turn that at least 2 times a year. Last year, we did a little bit better than that. This year, now with our new guidance, we're reflecting better than 2x as well.

And we talk to our operators all the time about being disciplined, focused and consistent, and your starts in the communities. And that's how we're building capacity to deliver more homes by that execution at the community level.

Our next question comes from the line of Anthony Pettinari with Citi.

I'm wondering if you could talk a little bit about expected seasonality for the year. And given the buyer traffic patterns you've seen, does it lead you to believe you'll see kind of a traditional spring selling season? Or could demand maybe be more evenly distributed throughout the year? And I think we've heard from others that buyers are visiting homes maybe on what used to be off-peak days or off-peak hours. Is that something you've seen? Or can you just comment generally on any kind of changes you've seen in buyer behavior?

Yes. We've certainly seen very different seasonality throughout 2020. Stronger demand through the summer, fall and winter in 2020 than we've seen historically. So we're coming off of some unusually strong periods. But that being said, with what we've seen thus far in January, we're seeing increases in volume that we would expect to see. It remains to be seen whether we'll still see the same percentage relationships between our Q2 and Q1 that we've seen historically or not.

But right now, we just see a very strong demand environment. Definitely some different patterns in buyer behavior than we've seen historically. but feeling good about what we can see going ahead. With a very strong Q1, where we see the same sort of patterns throughout the fiscal year, we historically have seen, I would expect there would probably be a bit of flattening of some of the historical patterns, but obviously, off to a very good start. And I think the way things are looking right now, we're optimistic about the spring.

Okay. That's helpful. And then it seems like some of your peers are pushing price and slowing down sales pace given some production constraints. I'm wondering if you're seeing markets where price increases by competitors are maybe a bit steeper than yours? And has that improved your value proposition for customers? Or maybe to ask the question another way, do you think your affordability edge is maybe stronger than it was 12 months ago with competitors raising prices? Or any kind of general comments on the pricing environment?

So if you just look at our average sales price increase over quarter over quarter-over-quarter compared to our competitors. And yes, I would say our competitive advantage has increased and improved. But again, it really comes down to the ability to deliver the homes. And I think that's where we've gained the largest competitive advantage with the discipline around what we're doing and the focus on efficiency over the last couple of years. So it's a -- it doesn't do any good to sell a house at any price if you can't deliver it. So we're focused on the delivery side of it and expanding our capacity via becoming more and more efficient through our processes.

Our next question comes from the line of Jack Micenko with Susquehanna.

We talked a lot about returns. We talked about underwriting, not really focusing on margin. And David, you sound pretty constructive on the land environment. I guess my question would be thinking about Horton as this longer-term 60-40 option versus owned mix coming in at 72% this quarter. Is 72% the new 60%? Is the goalposts changed? Or is it really more of an interim function, that's where the market's kind of brought you in terms of availability of new acquisitions over the last couple of quarters?

Actually, 70% is the new 60%. We're going to continue to try to grind that number higher. Ultimately, it comes down to relationships and execution in the field. And that's something we focus on every day. So my expectation over time is that we will continue to grind a point here, a point there. And drive better and better efficiency -- capital efficiency to our business and to our company and ultimately, probably the industry.

Okay. Great. And then looking at the single-family rental sale, it would appear that the gross margin on those 124 homes was pretty healthy, it may be in excess of the company margin. Am I looking at that the right way? Or is there something I'm missing? Obviously, you've got your G&A costs and everything below the line. But just from a purely margin perspective, it looks like that was a really healthy margin on the sale of those units.

Yes, we're very pleased with that transaction. And we look forward to that -- continuing to explore that business. It seems to be attracting a lot of capital and a lot of interest today. And we expect to be able to take advantage of that.

Our next question comes from the line of Susan Maklari with Goldman Sachs.

Congratulations on the results. My first question is just I wondered if you could perhaps quantify a bit more of the comments around January. Just perhaps framing the magnitude of what you're seeing either sequentially or on a year-over-year basis for us.

Su, 3 weeks in, we rarely comment on a single month, much less just a few weeks. So -- but suffice it to say, what we generally expect when we get into January, is we expect there to be a step-up in traffic and volume coming through our weekly sales pace. And so we have seen that. We've seen 3 weeks of weekly sales thus far, and there has been that discernible step-up in volume in January versus what we had seen in the December quarter. So we're encouraged by that.

Several years ago, we would -- the spring selling season to kick in with Super Bowl effectively at the end of January, early February. The past several years, this year being no exception, we've seen that sales pace accelerate coming out of the holidays after January 1.

Okay. That's helpful. And my next question is around what you're seeing in terms of some of the suppliers. We've obviously heard that with the ramp in volumes and some of the supply chain issues that those companies are seeing in their own businesses, that there's been some constraints maybe especially in some areas like appliances and windows. Can you just talk to what you're seeing there? And I guess, maybe in some areas, is there anything that you've heard more recently around the issue with some of the semiconductor supplies and some of the issues that they're seeing in those industries?

So really, various products are in short supply, Su. It kind of depends on what market and what day. Would agree with your sentiments on both windows and appliances, and we've had challenges in both of those. Our product partners have been working hard to support our business. So we don't have to push back any closings, and we've been very pleased where we have to, we substitute, upgrade and even install other brands if necessary to make sure we're not having to push closings.

I don't know that I have anything specific on semiconductors that I've heard as of late. But I really would have put windows again as the headliner this quarter. It's probably actually gotten even a little worse than when we said that last quarter.

Due to time constraints, our final question will come from the line of Buck Horne with Raymond James.

I'll try to keep this one quick. Question we get a lot from investors is kind of just where is all this buyer demand coming from? How sustainable is it? I'm just curious if you got, from a high level perspective, any evidence of the population migration that seems to be happening around the country. Are you seeing any noticeable uptick in out-of-state buyers or out-of-market buyers versus your historical normal? And has that changed at all one way or the other since the pandemic began?

I would say anecdotally, yes. I mean we continue to see Texas and Florida as our 2 strongest space with a lot of diversity just even within those states. But clearly, there has been a flight in a lot of cases from the coast to Texas to Florida, to the Carolinas. And then from the West Coast into Salt Lake, into Vegas, into Phoenix. And so I think we would expect that trend to continue. And in that regard, really like our positioning as it pertains to our lot position across the country.

I also like the fact that you don't see existing home inventory levels sale -- for sale at high levels, at all. Supply is very tight for homes that are available in the next 60 to 90 days. And that has been a consistent part of our business model for forever, is to be an alternative to that used home and provide a customer with a new home on their time line.

And Buck, you didn't ask this specific question, but we've had a lot of conversations over the last quarter or so about just the age. And for the last how many years about our millennial is ever going to buy a home, coming off around 35% of our business in 2019 was to buyers 34 and under. We saw that pretty quickly in the pandemic and through the remainder of fiscal '20 and now into '21 tick up to the low 40s. So I think 42% versus 35% is a pretty big move. And we've seen that settle out to where over 40% of our buyers are 34 and under. I think answering that question that, yes, millennials are going to own homes.

Everything we're seeing has been the long-term trends that we've been experiencing really coming out of the downturn. COVID accelerated it. And it feels like right now that, that acceleration is kind of the new norm going forward.

That's extremely helpful. And just one last one on the single-family rental business. Just a follow-up on that outstanding community trade. I'm just wondering you mentioned that you plan to double your investment in the platform over the course of this year. So it sounds like there's quite a bit of scalable opportunity. How do you think about the total market opportunity for developing single-family rentals within your platform? And would you continue on this method of building it yourself, pre-leasing it and then flipping it stabilized? Or would you presell some of these or partner with investors ahead of development? How do you envision the scaling up of that business?

Where we are today with the program is we're still learning the business and the execution side of it. We were very pleased with the first transaction. And as we learn more about the market, we will evaluate various alternatives for how we want to go about scaling it up and ultimately capitalizing it. But we need to know more about what we're doing. We do see a lot of opportunity. We think there is some portion of the population that will be a great customer for this product that desires a single-family lifestyle but may not, for whatever reason, be purchasing a home. And so we want to build up to be in a position to help to supply this.

And Buck, just to clarify, the comment about doubling our investment this year refers to our entire rental platform, both multifamily and single family. Our total assets and the combined platform at the beginning of the year was $330 million. So we expect that $330 million to more than double in fiscal '21.

We have reached the end of the question-and-answer session. Mr. Auld, I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. We appreciate everybody's time on the call today and look forward to speaking with you again with our second quarter results in April. And to the D.R. Horton team, an outstanding first quarter. We're set up to have an unbelievable year. Stay humble, stay hungry and stay focused. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.