霍頓房屋 (DHI) 2020 Q3 法說會逐字稿

Good morning and welcome to the Third Quarter 2020 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.

It's now my pleasure to turn the call over to Jessica Hansen, Vice President, Investor Relations for D.R. Horton.

Jessica, please go ahead.

Thank you, Kevin, and good morning.

Welcome to our call to discuss our results for the third quarter of fiscal 2020, in addition to current market conditions.

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 issue could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and subsequent reports on Form 10-Q, all of which are or will be filed with the Securities and Exchange Commission.

This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-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 am pleased to be joined -- 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.

We'd like to first, again, express our gratitude to our country's dedicated field of health care workers, and to all who are on the front lines securing for our communities.

Our thoughts remain with those affected by this pandemic, and our priority continues to be the health and safety of our employees, customers, trade partners and the communities we serve.

During the latter part of March, the impacts of COVID-19 and related widespread reductions in economic activity across the United States began to negatively affect our business.

During April, when restrictive stay at home orders in place for most of our markets, our sales orders decreased and our cancellations increased, and our April net sales orders were 1% lower than a year ago.

However, as restricted orders began to be lifted across many markets and economic activity resumed, our sales increased significantly and our cancellations rate returned to normal levels.

In both May and June, our net sales orders increased by more than 50% compared to the prior year periods, resulting in a net sales order increase of 38% for the quarter.

We sold 5,931 more homes this quarter than the same quarter last year, positioning D.R. Horton to achieve further gains in market share and scale.

We have continued to see strong increases in net sales orders in July compared to the same month last year.

Despite the disruption from COVID-19 on our operations, the D.R. Horton team delivered a record third quarter, including net sales orders of 21,519 homes, a 25% increase in consolidated pretax income to $782 million, and a 10% increase in revenues to $5.4 billion.

Our pretax profit margin for the quarter improved 170 basis points to 14.5%, while our EPS increased 37% to $1.72 per diluted share.

Our homebuilding return on inventory for the trailing 12 months ended June 30 was 21.6% and our consolidated return on equity for the same period was 19.9%.

While housing market conditions are very strong today, we remain cautious as to the impact of COVID-19 may have on the overall economy and our operations in the future.

We believe our strong balance sheet, liquidity position and experienced operating teams position us very well to operate effectively through the changing economic conditions.

We plan to maintain our flexible, operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales base and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.

Mike?

Diluted earnings per share for the third quarter of fiscal 2020 increased 37% to $1.72 per share compared to $1.26 per share in the prior year quarter.

Net income for the quarter increased 33% to $631 million compared to $475 million.

The current quarter results include an income tax benefit of $38.1 million related to federal energy efficient home tax credits that were retroactively reinstated earlier in the year.

Our third quarter home sales revenues increased 10% to $5.2 billion on 17,642 homes closed, up from $4.7 billion on 15,971 homes closed in the prior year.

Our average closing price for the quarter was essentially flat with last year at $295,200, and the average size of our homes closed was down 3%, reflecting our ongoing efforts to keep our homes affordable.

Bill?

Net sales orders in the third quarter increased 38% to 21,519 homes, and the value of those orders was $6.3 billion, up 35% from $4.7 billion in the prior year.

Our average number of active selling communities was essentially unchanged from both the prior year and sequentially.

Our average sales price on net sales orders in the third quarter was $294,500, down 2% from the prior year, primarily due to a decline in the average sales price for our West region as more of the region's mix shifted to our entry-level express brand during the quarter.

The cancellation rate for the third quarter was 22%, up from 20% in the prior year quarter.

Our net sales orders in both May and June increased by more than 50% compared to the prior year periods.

We believe the increase in demand after April has been fueled by increased buyer urgency due to lower interest rates, the limited supply of homes at affordable price points and to some extent, pent-up demand.

We were and remain well positioned for this increased demand with our affordable product offerings, lot supply and housing inventories, particularly completed homes and those close to completion.

Jessica?

Our gross profit margin on home sales revenue in the third quarter was 21.6%, up 30 basis points sequentially from the March quarter and up 130 basis points compared to the prior year 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.

We currently expect our home sales gross margin in the fourth quarter to be similar to the third quarter.

However, there is uncertainty regarding the future impacts of COVID-19 on the economy and new home demand which could negatively impact our gross margins in the future.

Bill?

In the third quarter, homebuilding SG&A expense as a percentage of revenues was 7.9%, down 20 basis points from 8.1% in the prior year quarter.

Our homebuilding SG&A expense as a percentage of revenues is at its lowest point in our history, and we remain focused on controlling our SG&A while ensuring that our infrastructure appropriately supports our business.

Mike?

We ended the third quarter with 32,800 homes in inventory.

12,700 of our total homes were unsold of which 2,900 were completed.

We also had 1,900 model homes at the end of the quarter.

Due to our significant increase in sales in May and June, the portion of our backlog that is not yet under construction is higher than normal, and our number of completed unsold homes is lower than in recent years.

As a result, we have accelerated our pace of home starts across most of our communities to ensure we maintain an adequate number of homes available for sale in each community to meet demand.

At June 30, our homebuilding lot position consisted of approximately 335,000 lots of which 34% were owned and 66% were controlled through purchase contracts.

32% of our total owned lots are finished and at least 52% of our controlled lots are or will be finished when we purchase them.

Our current lot portfolio includes an ample supply of lots for homes at affordable price points and continues to provide us a strong competitive position.

David?

Our third quarter homebuilding investment in lots, land and development totaled $1.1 billion of which $390 million was for finished lots, $380 million was for land development and $290 million was for land, $180 million of our land and lot purchases in the third quarter were from Forestar.

After slowing our lots and land and development investments in March and April, we have since increased our pace of investments to ensure we maintained an adequate number of finished lots to support our home construction base.

Bill?

Forestar, our major -- our majority-owned subsidiary, is a publicly traded residential lot manufacturer, operating in 51 markets across 22 states.

Our strategic relationship with Forestar as a well-capitalized lot supplier across much of our operating footprint is serving us well during this volatile time and is presenting opportunities for both companies to gain market share.

Forestar is delivering on its high-growth expectations with revenue growth of more than 200% and net income growth of 80% fiscal year-to-date in 2020.

At June 30, Forestar's lot position consisted of 50,700 lots of which 38,300 are owned and 12,400 are controlled through purchase contracts.

77% 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 $700 million of liquidity, which includes $350 million of unrestricted cash and $350 million of available capacity on its revolving credit facility.

At June 30, Forestar's net debt-to-capital ratio was 25.2%, and their next senior note maturity is in 2024.

With low leverage, ample liquidity and its relationship with D.R. Horton, Forestar is in a very strong position to navigate through changing economic conditions and continue to grow their business.

Jessica?

Financial services pretax income in the third quarter was $68.8 million with a pretax profit margin of 43.9% compared to $48.1 million and 40.2% in the prior year quarter.

Despite the disruption in the secondary mortgage markets in March and April caused by COVID-19 and the uncertainty of the impact of the CARES Act, our mortgage company has continued selling the mortgages it originates at strong net gains.

We began retaining servicing rights on some of our FHA and VA loan originations during the third quarter due to disruptions among mortgage servicers and we will continue to monitor developments in the mortgage markets and adjust our operations to adapt to changes in market conditions.

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 71% of our homebuyers.

FHA and VA loans accounted for 53% of the mortgage company's volume.

Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 718 and an average loan-to-value ratio of 91%.

First-time homebuyers represented 57% of the closings handled by our mortgage company, reflecting our continued focus on offering homes at affordable price points.

Mike?

DHI Communities is our multifamily rental company focused on suburban, garden-style apartments that had 4 projects under active construction and 1 project that was substantially complete at the end of the quarter.

After selling 2 projects earlier this fiscal year, no other projects were scheduled to be marketed and sold during our third or fourth quarters of fiscal 2020.

We expect to market and sell a couple of projects in fiscal 2021 based on our current pace of construction and leasing activity.

After pausing construction starts and new acquisitions by DHI Communities in March, April and May, we began selectively resuming plans for new projects in June.

And we still plan to grow the DHI Communities platform.

DHI Communities assets totaled $225 million at June 30.

We also continue to evaluate our opportunities in the market for single-family rental homes.

We are currently building and leasing homes in 9 single-family rental communities across our operations as we are in the early stages of our participation in this growing segment of the housing market.

Bill?

Our balanced capital approach focuses on being disciplined, flexible and opportunistic.

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.

During the 9 months ended June, our cash provided by homebuilding operations was $1.2 billion compared to $606 million in the prior year period.

At June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.9 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities.

Our homebuilding leverage was 18.4% at the end of June, with $2.4 billion of homebuilding public notes outstanding and $400 million of senior note maturities in the next 12 months.

At June 30, our stockholders' equity was $11 billion and book value per share was $30.38, up 16% from a year ago.

For the trailing 12 months ended June, our return on equity was 19.9% compared to 17.3% a year ago.

During the quarter, we paid cash dividends of $64 million, and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August.

We did not repurchase any shares during the third quarter and we expect to cautiously manage our level of share repurchases in the near-term to maintain financial flexibility until we have better visibility to future market conditions and our expected operating results.

Our outstanding share count is down 2% from a year ago, and we currently have an outstanding share repurchase authorization of $535 million.

Jessica?

As we noted last quarter, due to the uncertainty in the U.S. economy and our business operations from COVID-19, we withdrew our guidance for fiscal 2020.

Based on today's market conditions, we are now providing our expectations for the fourth quarter of fiscal 2020.

In the fourth quarter, we expect to generate consolidated revenues in a range of $5.5 billion to $5.8 billion, and to close approximately 18,000 to 19,000 homes.

We expect our home sales gross margin in the fourth quarter to be similar to the third quarter, in the mid-21% range and homebuilding SG&A in the fourth quarter to be 8% to 8.2% of homebuilding revenues.

We anticipate a financial services pretax profit margin in the fourth quarter of approximately 40%, and we expect our income tax rate to be approximately 23%.

The we plan to provide annual guidance for fiscal 2021 when we have sufficient visibility into market conditions, hopefully, on our next earnings call in early November.

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 safely continue helping our customers close on their much anticipated new homes.

This concludes our prepared remarks.

We will now host questions.

(Operator Instructions) Our first question today is coming from Alan Ratner from Zelman & Associates.

Congrats on a great quarter.

I'm glad to hear everyone's doing well.

First question on the spec inventory supply, not surprisingly, came down quite a bit just given the dynamics in the quarter and how strong demand was there.

And you mentioned, obviously, a greater percentage of your backlog right now has not yet started, which makes a lot of sense.

And I'm just curious, as you ramp your start activity here, and I'm sure other builders are doing the same to not only build out your existing backlog but replace the spec inventory, presumably.

What are you seeing on the labor side as far as any tightness there?

Any inflation that's starting to build up because it seems like there's a pretty healthy ramp and starts coming?

Labor has been a challenge throughout this entire market cycle.

So we focused early on, on driving efficiency through the operation, partnering with our labor trades and have seen the benefit of that all the way through this cycle.

The reality is, as I think Mike will tell you, the build cycles continue to be very, very stable.

And just the process of how we build and how we treat our trades, has proven to be very effective in managing this situation.

Got it.

Okay.

That's helpful.

Second question, just as you start to think about '21 here, the sustainability of this demand is certainly a big question at the point.

In the last several years, you've done a handful of M&A transactions on the private side.

And I'm curious, you mentioned buyback, potential buyback activity.

How are you thinking about M&A right here given the climate?

And what are you seeing as far as the pipeline is concerned?

Alan, we continue to evaluate different opportunities, and it still comes down to where we can add to the long-term value of the company, where we can add product and new customer base to serve, but more importantly, people that are accretive to the operating teams.

So we continue to talk with several private builders.

We're more inclined to look at the tuck-ins that we have done, either adding to existing markets or opening up new markets for us.

But you won't see us probably do any massive public acquisitions, but I do think we will continue to evaluate the smaller privates.

Have you seen any changes in the privates willingness to sell, just given kind of the uncertainty in the climate today?

Or has this bounce back in activity perhaps emboldened them a little bit to remain an independent company?

I would say it's both.

And it's going to vary based upon the situation of a particular private builder as to whether they're thinking it's still a good place to be or if it's time for them to do something different and to join a bigger operation.

I will add that we don't -- we're not in a position where we need to go ahead.

And it really does, have to be a great fit.

And at this point, they would have to want to join our family and it's not going to be a stretch, kind of a win-win for them at us.

Our next question is coming from Stephen Kim from Evercore ISI.

Yes.

I wanted to follow-up on the cycle time and spec question that Alan just asked.

So you mentioned cycle times are very stable.

That's obviously extremely encouraging and exemplary, I would say.

But we have seen your specs are down, and obviously, demand has surged significantly.

So I guess the bottom line question for me is, would you like to increase your spec levels from where they are today?

And are you able to do so in an environment where demand is as strong as it has been?

Answer to your first question, yes, Stephen.

We would like to increase our spec levels today.

We have an aggressive starts plan to increase our specs at the same time we'll be starting our sold homes.

And so it is a big plan to start out this.

But as David mentioned before, we've been focusing early on, on the efficiency, in the product and the operational focus, and partnering with our trades and being sure that they're capable of supporting the growth that we have in front of us.

So we do think we'll be able to increase our spec inventory, but it's not going to be without a lot of effort.

I can promise you that.

The focus right now is on driving a consistent sustainable start program, week-to-week, project-by-project.

And as we continue to execute that, I think our spec counts will come back to what we historically have carried.

Yes.

No, that's great.

Very encouraging to hear.

And obviously, we would -- we look to Horton to take on those challenges.

I wanted to ask a second question about pricing and the pricing environment.

It would -- it seems, obviously, that Express remains extremely strong.

I'm curious if you're seeing increased interest in Freedom and the traditional D.R. Horton business more recently, and whether that allows for a little bit more pricing flexibility perhaps than we had seen in the past, particularly the D.R. Horton semi custom business.

And a second half of that question is whether or not you're seeing the mix of local demand versus out-of-state demand driving what you saw in May and June?

And is there a difference in your ability to price -- push price for -- when you're selling to a local versus out-of-state?

I would say as to the branding, we are seeing uptick in demand for both Freedom and the D.R. Horton brand.

As to the state question.

I would say we're seeing increase in demand from both buying profiles.

The relocation of people down to a more affordable tax friendly environment continues and I think COVID maybe is even accelerating that.

Pricing is something we track week-to-week based upon demand at each individual flag and it's kind of a -- I've always considered pricing an art, not a science.

You want to -- you never want to be in a position where you push pricing so hard that you have to come back and adjust it back down.

You always want people to feel like if they buy today, they'll save a little bit of money, they'll save money versus buying 6 months or a year from now.

So fortunately, our company, the entire structure and mentality is that those decisions are made in the individual communities and divisions.

And the people that are closest to the market actually, we feel like, make a better decision than we can make up here.

Our next question today is coming from John Lovallo from Bank of America.

The first one, May and June at 50% year-over-year order growth is clearly very encouraging.

Just -- I know you said July was strong, David.

Just curious if you could help us frame that in any way, how strong it was on a year-over-year basis.

It's consistent with what we saw in May and June.

Okay.

That's...

It really is a testimony to our people and our positioning out there, but it's a very, very, very good market right now.

Okay.

No, that's really encouraging.

With that in mind, the overall tone maybe could be seen as just slightly more cautious than some of your peers, which is, I think, consistent with how you guys have always sort of run the business.

And I think it's prudent.

But just curious, is this really conservatism just given unemployment, COVID, things that could happen?

Or are you seeing any signs anywhere of any slowing, I mean, in traffic or whatever it might be?

No signs of slowing.

It's just a lot of uncertainty out there that is completely outside of our control.

If you just look at long-term trends in the industry, demographics, where the supply is versus where the future demand is going to be or should be even today, you got to feel very, very good about the long-term.

But in this industry, I mean, you saw what happened end of March, completely out of the -- from nowhere.

So I do think we'll have a lot more visibility as we get into the November-December time period next year.

And hopefully, we can reinstate the guidance numbers that we can then turn around and hit.

We're always going to be conservative.

I mean, that's -- you've got Bill Wheat for a CFO, you're going to have conservative.

Our next question is coming from Carl Reichardt from BTIG.

Going back to Alan and Steve's question about spec and the amount of unsold you have.

And maybe Mike or David, is this -- if you look at your backlog, your sold backlog, are you closer to completion with that than you would typically be at this time of year?

And of your unsold spec, are you closer to finishing that than you normally would be this time of year?

So I would say that we are generally going to be in line with the started sold homes, are across the range of production largely this time of the year, delivering into the fourth quarter.

And similar with the specs, we're probably maybe a little bit less finished with the specs because of the strong sales demand that we've had, they've moved to the sold category, and we have them sort of set to close, if you will -- sold to close in the September quarter.

So we feel really good about the ability to deliver the fourth quarter and the starts plan that we have out and the building permits we were able to accumulate.

We feel good about being able to reload the inventory and bring us back to sustainable inventory levels we need to support the demand.

Okay.

Thanks, Mike.

Obviously, it's a function of the vagary of this market.

So just trying to understand the math.

And then just a bigger picture question.

In your release and on the call, you talked about low rates motivating folks and maybe some pent-up demand.

You didn't talk about this idea of the urbanization or de-densification driving demand?

And I'm curious if that's something you think you've seen and if you have some sort of sense from the field or math that tells you that you're seeing more folks come from urban areas to purchase homes in suburbs or exurbs.

And I'd just like your observations on that.

I think -- well, this is David.

I think that's a trend that was in place before the COVID-19 and I think it's really tied toward the millennial being a more conservative, disciplined buyer of homes than previous generations.

But they were forming households later, having children later and I think this pandemic has accelerated the trend.

And what do you call it, kind of demand or pull forward demand or -- there's just a whole lot of people out there that I think are going to be looking for housing over the next 5-plus years.

And Carl, I think what you're referring to is a longer-term trend that I think is continuing.

I think certainly, the pandemic has had an effect on it.

We would generally agree that, that is a trend that probably is accelerating right now, but it's still too early to know the depth of that and the sustainability of it.

So we try to just comment on what we see in front of us, and then we'll live into the rest and be able to comment on the depth of that as time marches on.

Our next question is coming from Eric Bosshard from Cleveland Research.

Curious in terms of what your plans are, in terms of price and incentive.

I know you had talked previously a quarter ago about sustaining incentives.

But seeing where orders are, your inventory appears healthy.

What is the strategy in terms of pricing and incentive in total?

And then secondly, if you could just drill a little bit more into California, specifically on that question as well.

So broadly, on the pricing incentives, as David mentioned before, it's a very local decision that's made.

I can tell you that we did see very strong sales demand and so the level of incentives we were offering on sales later in the quarter were much lower than what we opened the quarter with.

So we did see firming pricing trends, firming incentives.

And in turn -- but to see where that's going to go, we're going to meet the market.

And right now, we feel really strong about the sales trends that we're seeing without needing to do heavy incentives.

But every day, in every D.R. Horton community, there is some level of incentives and potential pricing adjustments to meet the market, whether that's up or down.

And we do see tremendous value created with the urgency for buyers by, as David mentioned before, feeling like they'll save a little bit of money if they act today rather than wait for a few more weeks.

As to California, we're seeing stability and consistency out there today.

We have reset our product and positioning out there to the entry level, pretty much everywhere we can.

And it's driving better returns today than it has in the last 4, 5 years.

Great.

And then just 1 follow-up, if I could.

In terms of land acquisition, as demand has improved broadly, and it appears that builders broadly are more active and aggressive in buying land, anything you're seeing different in terms of the competitive environment for securing land or any impact that's having on the cost of securing land?

Yes.

Land prices are going to go up as the absorptions continue to move up.

So our focus has been and will continue to be relationships with developers.

The fact that our operating -- operational teams in these markets have been there a long time, have great relationships with land sellers, I think gives us an advantage, our ability to close gives us an advantage.

Our absorptions per flag if you're developing lots, you want to be selling to somebody who is going to drive very high absorptions.

So it's -- I do believe we have a competitive advantage, people and capital and just operational efficiency.

So I can tell you right now, we're seeing a lot of deals.

The COVID scare, I think, really created opportunities for us to open relationships with sellers that had been primarily selling to other competitors.

So feel very good about our land position today and the things we put in place to sustain that over time.

(Operator Instructions) Our next question is from Michael Rehaut of JPMorgan.

Congrats on the results.

First question, I didn't catch, and apologies if you had mentioned it, what your average community count did this quarter sequentially or on a year-over-year basis.

And obviously, with the incredible amount of strength and sell-through right now, if you can give us any sense of how you're thinking 4Q might trend, at least in the near term.

Sure, Mike.

Our community count was flat, both sequentially and year-over-year.

And as you can imagine, with our very strong sales pace, we might not be in a position to see community count growth in Q4.

It will probably stay closer to flat, maybe slightly down.

But we have a lot positioned to continue to deliver homes and communities going forward.

So we feel very confident in our ability to continue to drive absorptions and ultimately have some community count growth that may just be pushed a little bit further out later next year.

Okay.

Also with -- I was just kind of curious about kind of on this topic, with Forestar giving up guidance of midpoint of about 11,000 loss deliveries for next year.

And I believe that was a little bit below their prior guidance, pre-COVID and understanding that, obviously, there was a disruption perhaps in some of the development activities for a month or 2. At the same time, you guys are looking at very, very strong results currently into July.

I was just trying to get a sense for maybe how that reconciles Forestar, maybe looking at a bit less of a delivery year than originally planned despite demand coming back extremely strong for you, how those 2 kind of fact patterns work against each other because I would have thought perhaps -- and maybe it's just more of a timing issue, but 1,000 lots is not immaterial.

So just trying to get a sense of how to reconcile those 2 data points.

Mike, it is primarily timing.

It's July of 2020 and Forestar was reestablishing just preliminary delivery guidance for fiscal '21 at a time in which their largest customers not providing 2021 guidance.

So it's just early.

I felt like it was important for Forestar to reestablish at least a baseline expectation for their top line growth next year.

Given that they are truly a growth story, and their revenues have been up over 200% this year.

But it is a bit conservative, we hope.

And as we live over the next few months, and as D.R. Horton gets sufficient visibility to provide guidance for fiscal 2021, our hope would be, certainly, if demand trends continue as they are right now, the strength continues in the industry.

I would expect that Forestar would ultimately be able to exceed that and increase their guidance over time.

It's really timing.

Right.

Right.

One more quick one, if I could, I guess, squeeze another one in.

On the gross margins, obviously, a lot of strength there.

And you mentioned that you're getting some pricing power back, obviously, which makes sense.

Is there -- and I know you're not giving fiscal '21 guidance at this point.

But just conceptually, perhaps, if you're looking at your gross margins and backlog currently and what you're seeing on the ground, in terms of just achieving some incremental pricing, achieving some incremental scale, et cetera, is there any reason to think that you wouldn't be able to hit like a 22% gross margin next year with all those factors, just given the momentum you have right now?

Again, just trying to think conceptually.

Obviously, I know you're not giving guidance right now, but just along those lines, if you have any thoughts.

Conceptually, we would love a 22% gross margin.

But looking forward, we could see that there could be some headwind coming at us from lumber later into the fourth quarter and into early '22 -- early '21, excuse me, I'm getting confused on my years.

And we do have a backdrop right now of a strong demand environment and some pricing power can relieve on incentives.

So we have some positive tailwinds, but we also have some headwinds.

And there is still a broader outlook that we're looking at here, what's going to happen in the economy and how the pandemic progresses through the fall and into the winter of next year.

So we feel very good about being consistent with our level of margins to drive the right pace that ultimately for us is looking to drive the right return.

And that's what we're ultimately looking at in every community, is how we maximize the return we built with every (inaudible).

Yes.

Our -- I apologize for the background noise on the line, I'm not sure where that's coming from.

Okay.

And in terms of our overall company-wide ROI, Mike, we're at 21.6%, which I think is probably a record return on inventory that we've generated, that's delivering almost 20% return on equity as well.

So we'll continue to balance that pace and price, as Mike mentioned, to maximize returns for both inventory and equity.

Mike, you're up now.

Go ahead.

If you said something, sorry.

Our next question today from Matthew Bouley from Barclays.

I wanted to stick with the gross margin side.

I guess, specifically, just given some of the underlying pricing strength in the market, how are spec margins comparing versus to-be-built today?

And going forward, when you have this decline in available spec here and in particularly finished spec, how should we think about what the implication to gross margins would be as a result of that?

Certainly in a strong demand environment where we've been selling a lot of completed specs, the gap between margins, between specs and build-to-order is narrower than normal.

But still, typically, we do still see higher gross margins on a build-to-order versus a spec.

But today, that gap is a little tighter than usual.

Okay.

Understood.

And then just secondly, and apologies if I missed this, but Bill, if you could speak a little bit about the share repurchase plans and sort of what it will take to help -- to kind of foster reaccelerating that?

Sure.

There's a lot of moving pieces right now.

We went through a very volatile quarter in terms of demand, in terms of what we had to do in our operations and the adjustments we've made there.

And still going forward, it's in our forward visibility.

We're seeing extremely strong demand.

We've seen a sell-through of our spec inventory so we're actively reaccelerating our specs now.

So first and foremost, we're focused on our business and what we feel like we need to reinvest to keep our spec inventory at the level we'd like and keep our lot inventory replenished.

And so until we get a better sense of what that need is in the core business, then we'll adjust our -- then we'll put our plans in place for share repurchase.

Over the next few months, we'll be sitting down with all of our operators across the company and putting in place our business plans for fiscal '21.

And as we get that set, then that will help further define and give us better clarity on what we'll do in terms of our share repurchase.

So our statement is we're going to cautiously manage our share repurchase, and we still have an authorization in place.

And we'll update those plans accordingly as we get better visibility in our business.

Our next question today is coming from Truman Patterson from Wells Fargo.

Nice quarter.

So just -- I don't think anybody is really expecting you to run at 50% plus order growth forever, just given the supply side constraints.

Are you all really focused on thinking next quarter to pushing price a little bit harder to kind of curb these absorptions?

Or are you pretty comfortable at this pace and running at these absorptions given your community count and lot count and everything?

Just trying to understand which lever you're really trying to lean on a bit more going forward.

Yes.

Right now, we're very comfortable with our lot position going out into '21.

We have seen significant and competitive advantage result from the continued consolidation and market share gains.

There is -- what we focus on internally is consistent, sustainable operations and feel very good about our pace right now.

Market is certainly there.

And the pricing side, short-term price increases actually increase demand sometimes.

So again, it's an art.

It's -- and we leave those decisions to local markets.

So like Bill said, over the next 30 days, we'll be putting to get an operating plan for '21, finalizing.

I guess we've had 1 for some time, but finalizing it.

And that will drive a lot more visibility about how we're going to position for '21 and then '22 and then '23.

Okay.

It sounds like your lot positions may be bucking some of the industry trends recently.

If I look at your fourth quarter implied backlog conversion rate, it looks like it falls to about 80%.

Lowest level in, I don't know, 5 years or so.

I think that's pretty clearly a function of construction delays or maybe lack of starts during COVID.

Do you think that you can get that back up and running where your backlog conversion gets to kind of normalized or flat in the first quarter of '21?

Or second quarter of '21, somewhere in there?

And then also on that, how long do you think it will take for you to get your spec count kind of normalized in today's market?

Well, first, we're not seeing really construction delays.

Our cycle times have been very, very consistent really throughout.

And backlog conversion really isn't a step that we focus too much on.

We focus more on our inventory position and our inventory turns.

And right now, we're seeing our inventory turns accelerate.

Our sales pace, obviously, has increased dramatically the last few months, which did work down our completed homes -- completed specs.

So our completed spec inventory is lower than it has been in some time.

Also the component of our backlog that has sold but not started is higher than normal so as we accelerate our starts pace, that will bring those 2 back to a closer -- closer to a normal level.

And we expect to still deliver a very strong volume, but it takes really our lot position and our home position to support that.

Okay.

Asked another way, your inventory turns will probably be lower in 4Q.

Do you think that kind of gets back to more normalized levels in the first half of '21?

Would that be...

I think our inventory turns are actually higher than they were a year ago, and I think Q4 will continue that way.

In fact, I think that was part of our original guidance for fiscal '20, was that we were expected to turn our housing inventory more quickly this year.

And that is what we're doing.

Our next question today is coming from Susan Maklari from Goldman Sachs.

My first question is just around -- obviously, there's a lot of uncertainty as we think about the broader macro environment.

And given your buyer base, have you done any analysis or have any thoughts on the impact of the reduction in the stimulus programs that are scheduled to come up later this week?

How do you think that, that has kind of played into the demand that you've seen over the last couple of months?

And how are you thinking about it going forward if there are changes there?

Susan -- I'm sorry, go ahead.

Go ahead, Mike.

No, you go ahead.

What I think we're seeing with most of our buyers and the traffic we're seeing is that those people are not directly participating in a lot of the stimulus programs or relief packages that are out there.

The underwriting required for a mortgage today is generally going to first start with a job and a steady, predictable income stream.

And so we've not seen a direct impact to that.

To the extent there's a broader follow through to the economy, we'll have to wait and see.

That's part of the conservatism, I think, in our outlook going forward, is to see how that plays through in the broader economy.

And just to add, the amount of stimulus, it's already been pushed out and will continue to be pushed out.

I think, between now and the end of the year, is going to impact the markets for multiple years.

It's just a lot of liquidity that will filter through the overall economy, and I think have a positive impact on housing and people's ability to buy homes.

Okay.

That's helpful.

And then you noted in your commentary that the average size of the home came down 3% in the quarter.

But as we kind of look out at some of the secular shifts that are perhaps coming through from COVID, more people working from home, their kids being home a lot more, are you seeing any of your buyers that are actually looking for a slightly larger home or more space?

Or any kind of changes to the layout?

We are seeing more consideration given to a setting that accommodates a better work from home environment, whether it's an extra bedroom to be used for a classroom, an office, a playroom, that provides a little more space.

But a lot of our floor plans today accommodate at a lesser aggregate square footage, a lot of very functional space, whether that's flex rooms or fourth bedrooms that work very well for that today.

So we're really pleased with the product offering that we have out there.

But fortunately, in most of our neighborhoods, we're able to respond to buyer demand very quickly, and adjust to what the current buyers in our sales offices are asking for with our inventory homes, with the next round of starts we have in given neighborhood.

Our next question today is coming from Buck Horne from Raymond James.

Congrats on the quarter.

Question on SG&A, a little bit as you're trying to ramp back up on the land spend and get some more flags in the ground.

Is there any sort of near-term of -- not disruption, but are you going to have to reinvest in hiring people?

Or do you need to start reaccelerating technology investments to keep up with the pace of demand right now?

Is there anything on the SG&A side that we should consider in the near-term as demand is so rapidly increased that you need to accelerate some investments there?

Yes, Buck.

I don't think we see anything that will move the needle dramatically.

It's just a continuation of what we've been doing.

We did briefly have a hiring freeze during those -- that month or so at the beginning of the pandemic, but we're back to normal in terms of hiring across our homebuilding and financial services operations.

We're growing the business, we're always hiring and adding where we need to.

Same thing on technology.

We've been making, continuing investments over the last number of years and we've redirected some of those during the pandemic to address the work from home environment and a few things like that.

But those expenditures are not anything that's really out -- that is going to move the needle in total because there's also things we're not spending as much money on today.

Travel is not as big a portion of our spending as in the past.

Hopefully, at some point, it can be.

But we're in a company low, in terms of our historical SG&A percentages and expect to be able to stay at that level going forward.

All right.

Great.

Congrats and very helpful.

Next question just is on the single-family rental component.

It seems like your thoughts have evolved on that potential market opportunity and what you're seeing in terms of maybe the potential for it, built for rent product offering in your communities.

I'm just wondering if you could expand upon your thoughts at this point?

And is that something you would like to have a portfolio that you could operate internally?

Would you look to sell those as you build them?

Or partner with another operator?

We just -- how do you think about single-family rentals at this point?

Buck, that's something that we're still learning our way into.

We feel really good about the handful of communities, I believe, 9 communities today that we have homes being constructed for the purpose of rental.

And we'll have to see.

We'll have to see what the market brings us, if we bring some of those communities to market for sale or if we build a portfolio to operate or aggregate to a portfolio for an eventual disposition.

It's something we're learning our way into today.

So we'll be back with you as that progresses.

Our next question is coming from Mike Dahl from RBC Capital Markets.

First question, I wanted to go back to the sold but not started in backlog and I think you guys mentioned a few times and responded to a previous question that percentage is higher than normal, which makes sense.

Could you actually -- could you give us what that percentage is in terms of what's sold but not started and how that compares on a year-over-year basis?

And maybe as part of that, I don't know if you have any quantification of kind of like what an average -- I know your build cycle is flat, but what an average delivery quote would be in terms of what you're able to quote to new buyers today versus what you'd normally be able to?

I'll take the second part of the question while Bill and Jessica looking for the answer to the first part.

Right now, we're -- we would not be able to quote to you an average because it's going to vary based upon which community you're in and the level of production that's available within a community and the type of product that it is.

Some communities, we have a very quick build time and can deliver homes from start to completion in 3 months and others, it may be a 4- or 5-month build cycle.

And then generally, if we're looking to have inventory that's available to move in within the next 30 days as soon as you can clarify your mortgage situation and get qualified.

We'd like to have a home that's ready for you as soon as you can -- you need it.

And then, Mike, on the sold not started, we're running low double digit, a little over 10% sold not started, which we normally, I think, would be in the low single-digit percentage.

Maybe...

Got it.

That's really helpful.

And then second question and not to belabor the pace versus price too much, but understanding that it's a local decision.

I guess, are you getting the sense that your local operators are -- given some of the uncertainty that may still be out there, they are making the decision to let pace run a little hot for the foreseeable future, just capture what's out there, while it's still out there type of mentality versus those operators pushing price more aggressively?

I know you talked about incentives coming down, but just wondering if you have kind of a pulse of what your local operators are leaning towards today.

Mike, pace versus price versus margin has a lot to do with community size, where it is in the community.

You may push price in a community where you -- on the back end of it.

And your deliveries sales base is going to be 3 or 4 months worth of inventory, or 6 or 7 months worth of inventory.

And then you have other communities where you may have 1,000 lots out in front of you.

And driving pace actually generates a higher return than trying to find that absolute right margin dollar that either cuts off sales or allows sales to increase.

And we trust our operators in the field to make those decisions.

We incentivize them to make good decisions.

And it's a model that's been a part of the company for the 32 years I've been here.

And it seems to be working.

So it really is a community-by-community process.

Got it.

And just a quick follow-up to that then.

As you think about the 2021 plans, is that when you may introduce a little more kind of nudging in one direction versus the other?

Or is it -- you're really just -- I mean, what you're seeing today is pleasing in terms of how everything is being managed?

We could do better.

We can make better decisions pretty much every day.

You get up and don't make a mistake, you probably didn't do anything.

So we're going to walk through communities with our operators, and we're going to talk to them, are you making the decision that is going to drive the highest return for the shareholder.

But ultimately, what we have seen over years and years and years is that when you empower people and you give them authority and responsibility, they become better managers.

And their relationship -- it's a culture.

I mean, it's who we are.

And we're just not going to sit up here and try to drive pricing decisions and a community and pick any market you want to.

We've reached the end of our question-and-answer session.

I'd like to turn the floor back over to David for any further or closing comments.

Thank you, Kevin.

We appreciate everybody's time on the call today and look forward to speaking to you again in November.

And to the D.R. Horton family, once again, you have outperformed the industry, setting record, all-time record for sales of 25 -- 21 5 -- 1,000 -- 21,500 sales.

Unbelievable accomplishment.

Don Horton and the entire executive team are humbled and thankful that we're here to represent you.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time and have a wonderful day.

We thank you for your participation.