霍頓房屋 (DHI) 2013 Q4 法說會逐字稿

Good morning, and welcome to the D.R. Horton America's Builder, the largest builder in the United States, fiscal year end and fourth quarter 2013 earnings release conference call.

(Operator Instructions)

It is now my pleasure to turn the call over to your host, Mr. Donald Tomnitz, President and CEO for D.R. Horton.

Thank you, Mr. Tomnitz you may begin.

Thank you, and good morning.

Joining me this morning are Bill Wheat, Executive Vice President and CFO, Stacey Dwyer, Executive Vice President and Treasurer, and Mike Murray, Senior Vice President.

As always before we get started, Stacey?

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K, and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

Don?

Thank you.

In fiscal year 2013, we experienced significant improvement in our homebuilding operating results.

Our investments in homes and inventory, land, lots, and development, positioned us to take advantage of a sharp increase in demand for new homes in the first half of the fiscal year.

And we also benefited from rising sales prices, as housing supply struggled to catch up with demand.

Our results from homebuilding and financial services were highlighted by $657.8 million of pretax income, and a 10.5% pretax operating margin.

Our strong pretax operating margin was driven by a 310 basis point year-over-year improvement in our home sales gross margin to 20.8%, and a 100 basis point improvement in our SG&A expenses as a percentage of homebuilding revenues to 10.7%.

The value of our net sales orders in fiscal 2013 increased 37%, due to a 19% increase in homes sold, and a 15% increase on our average selling price to $261,400.

We experienced strong pricing throughout fiscal 2013, with very solid demand during the first half of the year.

In the September quarter, our gross sales were up year-over-year by 19% in dollars and 3% on homes sold.

Our cancellation rate increased to 31% during the quarter, resulting in a net sales increase of 14% in dollar value and a 2% decrease in net homes sold.

Our fourth quarter sales reflect a moderation in demand that started in mid-May and lasted through September.

As economic conditions remained sluggish, and potential home buyers adjusted to both higher mortgage rates and increasing home prices.

However, we saw improved sales trends in October, as our net sales orders and dollar value increased year-over-year, and were higher than any month in the September quarter.

We are now in the slowest seasonal sales period of the year.

So our next good read on sales demand will be after the traditional Spring selling season begins in February.

We believe the housing market remains in a period of recovery.

And our expectation continues to be that the pace of the recovery will vary across our local operating markets, and will be closely tied to improvements in each market's economy.

As measured by growth in jobs, household incomes, household formations, and increases in consumer confidence.

We've seen a significant increase in housing demand during the past two years, but demand still remains below normal historical levels across most of our markets, which leaves opportunity for further improvement.

Pricing has recovered sharply in certain markets, but still has room to increase in many other markets.

We have also continued to proactively control our rate of sales, while raising prices in some of our strongest performing communities to ensure that our sales pace and backlog align with our construction cycles, which have lengthened slightly.

This ensures that our construction costs are certain before we establish the sales price of the home, which enhances our gross margins and profitability.

Mike?

Our net sales orders in the fourth quarter reflected our pricing power across many of our markets and our increased mix of move-up buyers, as the value of net sales orders increased 14% and our average sales price increased to $276,800.

The value of our backlog increased 33% from a year ago to $2.2 billion, with an average sales price per home of $269,400.

And homes in backlog increased 13% to 8,205 homes.

Bill?

In the fourth quarter, our consolidated pretax income increased 104% to $202.8 million, from $99.2 million in the year-ago quarter.

Our pretax income as a percentage of consolidated revenue was 10.9%, an increase of 350 basis points from 7.4% in the year-ago quarter.

Homebuilding pretax income more than doubled to $189.4 million from $85.7 million, and financial services pretax income decreased slightly to $13.4 million from $13.5 million.

Net income for the fourth quarter was $139.5 million or $0.40 per diluted share, compared to $100.1 million or $0.30 per diluted share in the year ago quarter.

Mike?

Our fourth quarter home sales revenues increased 40% to $1.8 billion on 6,866 homes closed, up from $1.3 billion on 5,575 homes closed in the year-ago quarter.

Our average closing price for the quarter was $262,500, up 14% compared to the prior year, driven by pricing power and an increased mix of larger move-up homes.

Our backlog conversion rate for the quarter was 69%, compared to 76% in the prior-year quarter.

For the first quarter of fiscal 2014, we expect our conversion rate to be around 65%, trending back down to a more normal historical rate.

This also reflects our continuing mix shift to larger homes with other construction cycles, and delivering more build-to-order homes than in recent years.

Stacey?

Our gross profit margin on home sales revenue in the fourth quarter was 21.9%, up 380 basis points from the year-ago period.

250 basis points of the margin increase was due to improving market conditions, resulting in reduced incentives and higher average selling prices in excess of cost increases.

80 basis points was due to lower relative costs for warranty and construction defect claims as a percentage of home sales revenue, and the remaining 50 basis points of the margin increase was due to lower amortized interest and property taxes.

Our gross profit margin on home sales revenue for the fiscal year was 20.8%, up 310 basis points from the prior year.

210 basis points of the increase was due to improving market conditions, 60 basis points was due to lower relative warranty and construction defect costs, and 40 basis points was due to lower amortized interest and property taxes.

During the fourth quarter, we reported $5.9 million in land option charges for write-offs at earnest money deposits, and due diligence costs for projects that we do not intend to pursue.

We also recorded $21.2 million of impairment charges, related primarily to longer-term projects that we held through the downturn and recently decided to sell as is to redeploy the capital into more productive assets.

Don?

Homebuilding SG&A expense for the quarter was $186.6 million, compared to $145.9 million in the prior-year quarter.

As a percentage of homebuilding revenues, SG&A improved 90 basis points to 10.3% from 11.2%.

We continue to leverage our fixed cost structure, while at the same time building our sales and production capabilities where necessary.

For fiscal 2013, homebuilding SG&A expense was $649.9 million, compared to $528.7 million in fiscal 2012.

As a percentage of homebuilding revenues, SG&A improved 180 basis points to 10.7% from 12.5% a year ago, as we've made significant progress toward returning to our annual SG&A goal of 10%.

In the first two quarters of fiscal 2014, we expect our SG&A as a percentage of homebuilding revenues to increase seasonally from our most recent quarter, as we typically deliver fewer homes in the first half of the fiscal year than in the second half.

Bill?

Since our active inventory exceeded our debt level, we recorded no direct interest expense this quarter, compared to $4.9 million of homebuilding interest expense in the year-ago quarter.

For the year, we expensed $5.1 million in homebuilding interest, compared to $23.6 million in the prior year.

We expect that our active inventory will continue to exceed our debt in fiscal 2014.

The improvements in our gross profit percentage, SG&A expense ratio, and interest expense expanded our homebuilding pretax margin to 10.4% in the current quarter, an increase of 380 basis points from 6.6% in the year-ago quarter.

Stacey?

Financial services pretax income for the quarter was $13.4 million, down slightly from $13.5 million in the year-ago quarter.

This quarter reflected a more competitive pricing environment.

Whereas the first part of this year and the prior fiscal year, benefited from usually favorable market conditions, which produced higher than normal gain on sales and mortgages.

88% of our mortgage Company's loan originations during the quarter related to homes closed by our homebuilding operations.

Our mortgage Company handled the financing for 53% of our home buyers this quarter, with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac or Ginnie Mae.

FHA and VA loans accounted for 45% of our Mortgage Company's volume this quarter, down from 51% in the year-ago quarter.

Borrowers originating loans with our Mortgage Company during the quarter had an average FICO score of 723, and an average loan-to-value ratio of 89%.

First time home buyers represented 43% of the closings handled by our Mortgage Company this quarter, compared to 53% in the year-ago quarter.

Bill?

Since June, our construction in progress and finished homes inventory increased by approximately $312 million, excluding non-cash items.

We had 17,000 homes in inventory at the end of September, of which 1,300 of our homes were models, 9,000 were speculative homes, and 3,000 of the specs were completed.

Our average community count for the quarter increased 17% from a year-ago.

In our fourth fiscal quarter, our investments in lots, land, and development totaled $552 million, of which $215 million was for land development, $183 million was to purchase finished lots, and $154 million was to purchase land.

During the fiscal year, we invested $2.6 billion in land, lots, and development.

At September 30, 2013, we owned 127,000 lots, and controlled 54,000 lots of through option contracts.

33,000 of our owned lots and 29,000 of our option lots are finished.

We are very well-positioned to meet demand in fiscal 2014 and 2015 with our 181,000 total lots owned and controlled.

Stacey?

Our unrestricted homebuilding cash totaled $913 million at fiscal year-end.

During the quarter, we increased the size of our revolving credit facility from $600 million to $725 million, and extended its maturity date to September 2018.

At September 30th, we had available capacity on our revolving credit facility of $663 million, and no cash borrowings outstanding.

The balance of our public notes outstanding at September 30th was $3.3 billion.

At September 30th, our homebuilding leverage ratio, net of cash, was 36.7%, and our gross homebuilding leverage was 44.6%.

Mike?

Subsequent to year-end, we acquired the homebuilding operations of Regent Homes for approximately $35 million in cash.

Regent operates in Charlotte, Greensboro, and Winston-Salem, North Carolina.

We acquired approximately 240 homes in inventory, 300 lots, and control of an additional 600 lots through option contracts.

We also acquired a sales order backlog of 213 homes valued at $31.1 million.

Don?

In closing, this quarter was D.R. Horton's most profitable fourth quarter since 2006, the $202.8 million of pretax income.

The majority of our operating metrics improved on a year-over-year basis this quarter.

The value of our sales, closings, and backlog increased by 14%, 40%, and 33% respectively.

Our pretax income increased 104%.

Our pretax income margin increased 350 basis points to 10.9%.

Our gross margin on home sales revenues increased 380 basis points.

Our SG&A, as a percentage of homebuilding revenues, improved 90 basis points.

Our average sales price increased 16%, as we experienced pricing power in many of our markets, and as our expanded, move-up, and luxury product offerings have received a very positive reception from our customers.

Finally, we would like to welcome David Auld to his new position as Chief Operating Officer for D.R. Horton.

David will oversee all homebuilding regions, and will play a solid role in guiding our operations.

David has been with the Company for 25 years, and we welcome his extensive operating experience to our executive team.

Congratulations, brother Auld.

We would like to personally thank all of our D.R. Horton team.

You are executing our business plan superbly, which is why our Company continues to perform so well, with improving margins, profitability, and returns.

Continue taking good care of our customers and outperforming in fiscal 2014.

This concludes our prepared remarks.

We'll now host any questions you have.

Thank you.

(Operator Instructions)

David Goldberg, UBS.

Good results.

Thank you.

I wanted to first talk a little bit about mortgage underwriting in the market today.

we've heard from a number of banks that we've seen that overlays that they are putting on FHA mortgages are loosening.

And I wanted to get an idea if you guys are seeing any of that in your business.

Obviously not necessarily in the FICO scores coming down at all, but are you seeing loosening with your clients, and do you think that's going to help as we get into the selling season next year?

David, we've not seen any significant changes in the underwriting standards that are available to our customers.

We have seen certain banks which have had more restrictive overlays now begin to make those overlays less restrictive so they match what's currently in the market.

But in terms of an overall loosening, we're not seeing anything significant.

Great.

And then my follow-up question.

It seems like we've hit of this slow patch in the market, and everyone, it feels like most of the builders are generally playing well in the sandbox and nobody's starting to discount really heavily.

Do you think that if the slowdown were to continue, and based on your historical experience, do you think if it were to continue into the selling season do you think you would see more of your competitors start to discount, start to get more aggressive to drive sales volumes, or do you think everyone realizes that might be a bit of zero-sum game at this point?

I don't think there's any question that we'll start with incentives if the pace continues into the strong selling season around Super Bowl Sunday.

Currently, even though we were down slightly in terms of units in the quarter, we were still up 14% in terms of sales dollars.

We think that's a great relationship.

And currently, we're not over reacting, because this is a normally slow part of the season.

But we have plans in place, coming January, to make sure that we drive the right amount of absorptions relative to our margins because it's a balancing act.

And we've got plans on a community by community basis, and I'm sure other builders probably will follow suit.

And in general, I think we'll see different activity from market to market.

And that will depend largely on what the inventory levels are.

In general, in most of our markets, inventory levels are either low or in balance.

And to the extent that inventory levels are not out of line or higher than where demand is, I think you'll see builders adjust their production schedules to match demand, which then would not require as much incentives.

But right now, we think we're in a great position.

We're up 14% in terms of sales dollars in the fourth quarter, and we're going see what happens, and we're going to adjust accordingly.

That's perfect.

Thank you, guys, very much.

Nishu Sood, Deutsche Bank.

Wanted to ask, first, about the soft patch that we've seen in demand since the Summer.

When it first unfolded, I think it a lot of folks in the market were imagining since it was rate driven, at least partially if not significantly, that the historic pattern of the first-time buyer being harder hit would generally play out.

And that was the perception.

But as this soft patch has dragged on a little bit, it's become clear that it's a little bit broader-based than that.

I wanted to ask for your folks thoughts on that with your special insights into the first-time buyer market.

Is it just the first-time buyers that were principally what's driving this weakness, or what are you folks seeing?

I think it's applying across all product and price lines to be frank with you.

And I don't mean to date myself, but as I sit around look at the table here, no one around this table can remember mortgage rates being higher than 6% or 7%.

And I think one of the factors that we are dealing with, quite frankly, is most analysts and most young buyers, especially first-time home buyers in the market today, have been accustomed to low rates for all of their lives.

So I do know one thing, rates are going to go up.

And we're going to have to deal with those on a go-forward basis.

But I think rates going up will indicate that the economy's doing better, and we're creating jobs.

And I think that will be good for the economy, and it will be good for us.

Great.

And I also wanted to ask about in your product mix, you folks mentioned having had some success in some of your move-up and your luxury product.

I also noticed that you mentioned the decline in your mortgage subsidiary in terms of the first-time buyer going from 53% to 43%.

So I wanted -- I should ask about your product mix strategy going forward here.

Obviously, you have shifted more towards the move-up buyers.

Is that something you expect to continue?

And is that stat out of the mortgage subsidiary, is that just an anomaly this quarter or is that reflective of a product's mix shift?

Well clearly, we've expanded our Emerald and our upper price point, and we're getting very good reception in the marketplace from that.

but be clear, we're expanding our business in all price points and all product lines, whether it be the low-end, the mid-price or the high-end.

And Stacey can speak more specifically to that.

And I think you are seeing that flow-through in our mortgage company, because they are primarily focused on our business.

So the mix of their results is probably a decent indication of what we're seeing in the homebuilder.

Just as a point of reference, in Q4, the number of homes that we closed over $500,000 was just under 5%, compared to 3% last year.

But the dollars have grown a little more significantly.

They're now 12.6% compared to 8.3%.

But as Don mentioned, we do plan to stay very focused on the first-time buyer, and the first-time move-up.

So in terms of trying to guess where that number is, going we don't have complete clarity.

And I would say also something driving that 53%, 44% relationship in terms of first-time buyers being down, is that as we expand that higher price point you're dealing with a more a second or third time buyer.

They're a little bit more familiar with the financial system, and a lot of those people drive their own mortgages and they have other mortgage companies, as opposed to just DHI mortgage company that they've done business with the in the past.

So, a lot of that has to do with their relationships in the marketplace, as opposed to a first-time buyer who many times has never dealt with a mortgage company.

From a longer-term historical perspective, historically, our normal percentage of our business that was first-time buyers was around 40%, 35% to 40% range.

So we continue to move closer to that longer term historical range, and our mix is really getting back to normal levels.

Okay.

That's helpful.

Thanks.

Stephen Kim, Barclays.

I think a quarter or so ago, you guys were really the first to indicate that you saw -- you were witnessing some effect from interest rates on the business.

And also, you were one of the first to talk about a bit of a shift in your land buying strategy to really focusing on lots where you felt like you could recoup your investment relatively quickly.

And particularly on that second point, I observed that your land spend this quarter, if you look at your land spend as a percentage of revs, it's on the low side relative to your peer group.

Indicating that you've been a little bit more cautious in buying land than your peers.

I was curious if you could comment on whether you expect land values to get incrementally more attractive over the course of the next several months?

Or what in general your land buying policy is today with respect to an eye for recouping your investment quickly?

As you know, Steve, land prices continue to go down very slowly and go up very rapidly.

And as we have adjusted our land purchases, I believe the same is happening in the rest of the industry.

And we're beginning to see somewhat more cooperation from the land seller today than what we were getting 6, 9, 12 months ago, just simply because there's less demand in the marketplace today.

And I think that will be reflective come the Spring, depending upon how well sales go in the Spring, the land sellers will adjust accordingly.

But generally speaking, land prices haven't come down but they're a lot more flexible on terms it seems like than what they were six and nine months ago.

And, Steve, I think a little bit of the slower activity you saw this quarter certainly is reflective when we see a little bit softer sales environment then we certainly do I just our spending.

But it also is reflective of the fact that we built up our lot supply very nicely in fiscal 2012, and the first half of fiscal 2013.

So we're in a very good position from a lot supply, and we really don't need to add too much here in the short-term.

So we have some flexibility and when we pick and choose to go make our investments.

And as DR would say, we've made some good purchases over the last 12 months.

We're bringing those raw land purchases into development, and have been bringing them into development.

So our feeling is, is that we're in a great position with lower-priced land, hopefully, than our competitors, since we bought a little bit earlier, and we ought to be able to help supplement and protect our gross margins on a go-forward basis with the new good projects that we're bringing on board.

Yes, great.

No, that's very helpful.

If we could -- I wanted to ask you a follow-up question with respect to land.

This quarter you took some charges for walking away from options, and also impairing some older lots you wee pointing out.

I guess first of all, can you give us a sense for the options that you decided to walk away from, roughly what vintage are we talking about?

Not an exact year, but are we talking like this was stuff that was recently purchased or older stuff?

And then with respect to the impairments, if you can give us a sense for whether or not there are additional lots that are out there that you own that you're sort of mulling it over.

They're close to the threshold where you'd say, well this is something that we might want to walk away from, or if you feel like what we saw this quarter was pretty much it?

I'll let Bill handle the second part of the question.

But the first part I'd like to speak to specifically, and that is we did walk away from earnest money deposits and due diligence expenses on land deals that we were working.

But as the market slowed, we didn't want to acquire those lots because we didn't need those lots.

So, I learned and we have learned years ago, your cheapest walk away is your earnest money, as opposed to buying some piece of land or buying some lots that you really don't need in your inventory So that's what we chose to do.

Bill?

So on option walkaways, clearly those are land deals we've been currently working over the last months, several quarters, perhaps over the last year.

In terms of the projects that we took the charges on, those were projects that we have owned for a number of years that we bought pre-downturn.

And as we evaluated our best return opportunities, we had had plans to build through those projects, but our returns were going to be very low.

And so as we evaluated those, we determined our best option was to sell them in the short term and reinvest our cash into better opportunities.

On a regular basis, we disclose our overall evaluation for potential charges, and the number of projects that we continue to evaluate.

But that list has continued to get smaller over time.

And I believe it will continue to as long as we continue to see market recovery.

There certainly could be additional projects in the future, but as of right now, we believe that everything that we're going to move that requires a charge at this current time has been taken.

In a couple of instances, we basically -- what drove it was we had offers from buyers to purchase it, and we were forced to make a decision as to whether or not we wanted to keep it or take the cash in today.

And we chose to take the bird in the hand.

Sounds good.

Thanks very much, guys.

Very helpful.

Mike Roxland, Bank of America Merrill Lynch.

Congrats on a good quarter and good year.

Thank you.

The first question, pricing was better than we were modeling, and yet volumes were a little bit lighter.

And overall, gross margins were better than we were expecting.

Was there anything from a cost vantage point in the quarter that benefited you?

Was it lumber?

Was it OSB?

Or maybe was it just lower basis leverage that still continued to flow through the P&L?

Well we're still dealing with increased costs.

Right this quarter, and for the fiscal year, we've been able to increase our sales prices faster than what we have experienced to our cost increases.

But we still have good strong costs increases from our subs and our manufacturers, and we think that will continue into calendar year 2014.

Our goal from a national purchasing as well as from a local purchasing perspective, is to continue to hold those costs down.

And we believe that we're in a preeminent position to do that, just simply because in most of our markets we are the largest builder.

We're starting more homes than most people, and we're the largest builder nationally, which certainly helps us with our national contracts.

So we're proactive in terms of those respects, but so far, we've been able to increase our prices faster than our costs have increased.

Got it.

Very helpful.

Just last question, I wanted to get a sense from you as to how you see margins progressing the year or two.

You achieved a 29% gross margin this quarter.

And I think the last time you achieved this type of margin was back in 2006.

So how much further the do you think margins can go, especially as the higher cost land you're purchasing either today or a couple months ago starts to flow through your P&L?

Well, first of all we're not purchasing as much land today or in the past six months at the higher cost.

We feel like that we're in the preeminent position, based upon our purchases 12 and 18 months ago that we're developing on bringing to market here for fiscal year 2014.

But as Stacey likes to say, we've increased our margins, and we're hanging on to every bit as strongly as we can.

And that's going to be really impacted I think clearly when it comes to the Spring selling season.

And we have specific absorptions for community by community.

And I don't want anybody to think that we're sitting here asleep at the wheel, because we have a plan for each one of our communities to hit a specific absorption level and a gross margin level.

And we're going to fine tune that with the ROI.

So we're going to drive our absorptions, and keep in mind our gross margins and ROI.

We've seen a significant improvement in our gross margins, primarily as we saw sharp jumps in prices in certain markets because demand was outpacing the housing supply.

And so we've now recovered into a normal operating range.

As we move forward and as the supply is catching up to demand, we will still do everything we can to improve our gross margin.

But our expectation is that the increases in sales price will moderate as we have caught up on the demand side, until we see more substantial improvement in the overall economy and in the economy of our individual markets.

And as we said in our conference call script, we have had price increases on a number of our markets significant last year.

But there are other markets where we haven't experienced that kind of increase.

So we're hoping that those markets that have had a lesser increase in 2013 will have a stronger increase in 2014, and help us maintain our gross margins or even hopefully improve them.

But right now I would agree with Stacey, it's going to be a lot more difficult to improve our margins on the scale that we did in 2013 and 2014.

Got it.

Good luck.

Thanks for the color.

Good luck in 2014.

Thank you.

Eli Hackel, Goldman Sachs.

Just want to go back to your October comment, better than any of the months in the quarter.

Was that driven by anything related to incentives?

Was traffic constant from the fourth quarter into October and maybe they just ended up closing in October?

Just curious about the comments that you made there.

Yes.

It's difficult to know exactly what's caused it.

But just anecdotally, we do hear that there could be a little bit of pickup in demand.

And certainly buyers have had an opportunity to adjust now to higher rates.

Prices out in the marketplace are probably not increasing quite at the pace that they were in as many communities.

So I think it certainly buyers could be coming back.

There could be some level of incentives that are a little bit more that you may be seeing in some of our communities, or with some other builders that could be there.

But we're just pleased to see certainly some pickup in demand in October.

That's a good point, Bill, because as DR remember is when he sat in a model home himself selling homes, when interest rates go up, you have a dearth of traffic there for a week or two or as people are adjusting to the higher rates.

And I think Bill makes a great point, and that is, sales prices have increased dramatically in a lot of markets over the course of fiscal year 2012.

They're much more muted today, and I think the buyers are clearly getting more comfortable with where pricing is today.

And they're beginning to become more comfortable with where rates are today.

And as a home builder, I would say based upon all my years of experience as I told Stacey and just a few moments ago, if you're waiting for a better rate, and a better house price, you're going to wait and you're going to find higher rates and higher house prices.

So I think they're coming to the -- a number of buyers are coming to the conclusion that rates are not that high, home prices are not that high, and today is a great time to buy.

Thanks.

And then just one more question on the land.

It sounded like you were saying you're spending a little bit less now than you were.

I don't think you gave specific 2014 guidance, but do you think you'll end up spending less in 2014 than you did in 2013?

In terms of a land acquisition, today, it will really be determined based on where we see the sales environment in the Spring.

But today, our expectations is we would probably purchase less land in 2014 and 2013.

However, our land development spending is increasing quite a bit as we develop the land that we bought in fiscal 2012 and 2013 and bring new communities in line.

So our overall investments may not go down, but I think the mix will shift definitely more towards more development.

Great.

Thank you very much.

Adam Rudiger, Wells Fargo Securities.

Can you talk about your orders geographically?

And not at the metro level, but just maybe at your reporting regions.

There's a bit of a variance in terms of the different year-over-year changes.

And so, can you just talk about that, and in the light of also comment on how much community count may have impacted some of those different regions?

Sure.

As we look across our regions on a year-over-year basis for the quarter on sales, clearly our largest two regions in the Southeast and the South-central had very solid results up in both units, and then also seeing very good double-digit improvements in average selling prices.

That's the core of our operation, and we certainly saw good results there.

As we see good demand, there's a lot more job growth and more dynamic economies in many of those markets.

On the flipside, you can see our next largest region in the West, units were down or number of homes were down 15%, but our total value was up 12%.

So that's reflective of significant pricing increases in the West.

And I would say in general, we probably have more of our communities where we are pacing our rate of sales to our construction pace in our West region than in other places.

If you look at that West, that's is totally reflective of what Horton did in the quarter, but most importantly in the fiscal year.

And I'm not going to apologize for being down 2% in units.

but if you look at our total dollars of sales being up 14%, that's a great metric.

And we could have driven the volume more, but we chose to collect the profits and focus on the dollars and increase our average sales price prices market to market.

Okay.

Thank you.

And the second question is, can you off or can you provide any preliminary outlook on respect to community count growth in 2014?

We would expect it to continue to be up.

I think the rate of increase, we're at 17% this quarter.

I don't know that the rate of increase will continue that high on a year-over-year basis, but we do expect it to continue to be up on a year-over-year basis, at least for the next couple of quarters.

Great.

Thanks for taking my questions.

Dan Oppenheim, Credit Suisse.

I was wondering if you can talk a little bit in terms of the spec homes that you have, in terms of the 3,000 completed and the 9,000 under construction right now.

Just wondering if this is where you want them to be?

What percentage of sales during the quarter were specs?

And then in October, did you bring this down at all in terms of the better sales activity there?

We're sitting at about a 53% spec ratio today.

And I would say to you that we have adequate inventory in each one of our markets to meet our current demand.

And certainly in this time of the year, we expect our specs to work their way downward, simply as we sell our existing specs so that we can put new and fresh inventory out there come February and March when the selling season begins.

And our percentage of specs that we sold, it stays pretty much somewhere in the 60% range each quarter.

Okay.

And so no effort to bring that down and bring the spec sales up in October and bring the level down?

We would like to increase sales, and we'd like to increase spec sales, Dan.

So we're working on trying to bring the specs down slightly, so that we can refresh some of our inventory out there.

We're in our normal range.

So no major adjustments at all.

Yes, and, Dan, one of the things we've seen too is the spec percentage tends to follow our first time home buyer percentage.

So we've seen our first-time home buyer percentage trending down.

It's entirely possible the specs may move down a little bit too because of more of the higher-priced homes stay in backlog longer and people choose to do more customizations to build jobs.

But we've kept our spec percentage pretty much the same year after year, after year, after year, after year.

And Horton has always had slightly higher specs than other builders, largely because we focus on doing a lot of business with realtors as opposed to spending advertising dollars.

And as I've said many times before, realtors have one thing in common.

They would like to collect their commission as quickly as they possibly can.

And that runs in conjunction with our home buyers who, especially in this type of rate environment, are trying to take advantage of the interest rates before they change.

So we have a buyer who when they get qualified, they want to close as quickly as they can before rates move up and they can't qualify any longer.

And the realtors represent a huge percentage of our sales on a month-to-month basis, they want to be able to collect their commission in a 30-day period as opposed to a four or five month period on a build job.

Thanks.

Joel Locker, FBN Securities.

Just on amortized interest, it was about 160 basis points in gross margins.

Where do you expect that for 2014?

Joel, it's been declining.

As our overall leverage has remained lower, it's probably at pretty close to its low point.

As we're now capitalizing all of our interest, we're not directly expensing any now.

I think it our capitalized interest in inventory will rise a bit a little bit closer to our historic levels.

And then the level of amortized through cost of sales could increase slightly as well.

I don't expect any dramatic shifts, though, from here.

Right.

And on community count, what did you end the quarter with?

How much was it up sequentially from say June 30th to September 30th?

1% sequentially.

1% sequentially?

All right.

Thanks a lot, guys.

Stephen East, ISI Group.

Bill, you mentioned in community growth not as high in 2014 as in 2013.

Is that purely internal issues, or are you seeing stuff getting things approved getting through the pipeline all of that?

We hear it in some markets didn't know if that was an issue?

And also, when you look at the pricing that you think you'll be bringing your communities out this year, how does that compare to what type of gross margins you're getting today, versus underwriting?

Are we higher, lower, about what you expected as you went through the underwriting process?

In recent quarters, our community count has been up 15% to 20% in that range, which, pretty significant.

By and large, I would expect over the next couple of quarters, for the communities to come online reflective of our land spend in fiscal 2012 and 2013.

Our land spend in more recent quarters has moderated a bit from those levels, so I wouldn't expect the community count to continue to increase at the same pace; although, we expect it continue to increase certainly

In terms of our margin expectations on our new communities, that's one of the areas that we have very, very strong expectations.

We feel very good about the investments that we've made in fiscal 2012 and early 2013.

We certainly set strong margin hurdles for those projects, and we've seen market improvement in general since we made those purchases.

So our expectations is that margins should come in very good there.

Which hopefully, can provide some lift to our margins, or if we see some softening in the market and perhaps incentives rise or anything like that, that provides us some cushion and some flexibility to hopefully allow us to keep or maintain our margins up in the level where we are today.

Okay.

Great answer.

Thank you.

And then if we look -- your SG&A surprised me a little bit.

It ran about 70% of sales growth.

Your SG&A growth was about 70% of your sales growth.

Anything unusual going on there?

Is that stepping up the Emerald division?

Is there something else moving there because you all typically outstanding on this line?

The first thing to point out, Stephen, is that if you're looking at sequential growth from Q3 to Q4.

As we talked about last quarter, in Q3, our SG&A benefited by 40 basis points as a percentage of revenue, due simply to changes in our compensation accruals due to our stock price decrease last quarter.

So the sequential changes effected by that 40 basis point benefit last quarter.

And when we look at it exclusive of that, the change in the quarter is more closely in our historical trends.

And I would also say to you as our business has grown, that we've added more employees throughout the year.

And we've been slow to hire, and as a result, a lot of that -- what you see working its way through the SG&A has just been the realization that we needed to hire more people to be able to grow our business.

Okay.

All right.

And then just the last thing I had.

One housekeeping item, is what were the land sales and the revenues?

And then, D.T., your Emerald division, could you just talk a little bit about that about where you all are?

Where would you ultimately like to have that as a percentage of your business, that type of thing?

Well, I'd say we're at the very formative stages with our Emerald division, and we have it rolled out in a number of communities, some of which we are developing lots.

So we don't have the product online yet.

But the product offerings have essentially been from about $500,000 up to typically $1.2 million, $1.5 million, except for Palo Alto in California, where we basically had higher-priced homes than that just based upon the lot price.

But we're receiving the amenity level, in these homes, the finish out.

We're using different subs to build that product line is extraordinary.

And if you ever have a chance to get into one of our Emerald communities, you would be astounded at the high level of finish out, and the quality of the floor plans, and the quality of the exteriors.

And so as a result, we don't know where we can take that business.

But certainly we look at other builders who are focused on that segment of the business, and we feel like that we can continue to make strong inroads into their business and grow our segment of the business of Emerald.

Okay.

Thank you.

And the land sales in res?

Land sales revs were $15.8 million for the quarter, $61.1 million for the year.

And margin in the quarter was 23.4% on those land sales, and 16.7% for the year.

Jay McCanless, Sterne Agee.

Could you repeat the operating details on region, especially the units that are going into backlog?

Recent backlog units were 231 units in backlog.

213 units in backlog, and a $31.1 million sales value.

We acquired 240 homes in inventory, and 300 lots.

We also assumed control of another 600 lots in the process.

Great.

Has the -- with the market slowing down a little bit, has the opportunity set for similar deals increased?

Are you seeing more deal flow coming across?

We're always looking at all transactions that we see coming across.

And I would say that we have seen a bit of an uptick lately with folks exploring their alternatives, people that have been through a few cycles.

And maybe they're trying to time the top of the market, and maybe they're looking at the market cycle.

Whatever is driving it, we are seeing more deal flow.

Got it.

And if I could sneak one more in, what should we expect for the tax rate for next year?

Around 37%.

It could fluctuate a little bit either side of that, but around 37% is our current expectation.

Okay.

Thank you.

Michael Rehaut, JPMorgan.

Congrats on the quarter and the year.

First question, just on pricing trends throughout the fourth quarter.

D.T., you mentioned that you're trying to hold the line on incentives.

And maybe your actions might be different seeing how things might come together in January.

But I believe, if I'm not mistaken, in the past you've maybe referred to a degree or maybe other builders have -- I apologize if it hasn't been yourselves, but percent of communities where you've been able to raise price and maybe by what degree of magnitude?

Certainly things have slowed in the fourth quarter, but it does appear that you're still largely at minimum holding line on price if not raising in some areas.

So I was just trying to get a sense, if you could give us an idea what percent of communities you have been able to raise price either through higher base price or lower incentives?

And on the flipside, what percent you might have had to raise incentives here or there?

And how that contrasted the previous quarter?

I can answer that question very briefly.

Thank goodness we've never told you that information.

You must have us confused with someone else.

Generally speaking, clearly, the demand has been more muted in this past quarter.

And this, as I said earlier, is our normal seasonal seasonally slow period.

And again, given the fact that we are up 14% in terms of total dollars sales in the quarter, we're not going to over react.

I don't want to over react, and it's not the time to over react.

We had a wonderful September, and that was probably driven some by increased demand just off the top from people getting more familiar with the mortgage rates, more familiar with the housing prices.

But we are also in certain areas, certain communities also having sales programs, sales contests, and that sort of thing in a division by division community by community selected basis.

So in those areas, we are offering some incentives to drive that increase.

But we're not going to overact.

We're going to wait and see what happens in January or February.

But as I want to reiterate, we are totally prepared on a community by community basis with sales programs for each one of those communities in place ready to implement, based upon us wanting to meet a certain absorption level in each one of those communities.

And Don, when you said happy with September, were you referring to October actually the bounce back there?

I was.

Thank you.

Okay.

And just on October itself, is October typically a stronger month than September?

Or maybe there's some type of bounce back, again, people getting more used to the new environment?

And -- or would you expect as November and December typically would be more of a slower as you get into the quarter, would you expect that to be continuing more of a normal seasonality?

The normal seasonality would be you'd see your strongest sales in March and April.

And then you'd begin to see just a slow decline throughout the rest of the calendar year with an acceleration into January and February.

So our October is a seasonally slower time of the year.

It's typically lower than September.

We've also seen this pattern before though.

We actually saw it last year.

So our October call comp was a very tough comp, because last year we saw the same thing with October being higher than September.

Okay.

And then one last one if I could, the SG&A you mentioned in the prepared remarks that you expect it to be seasonally higher in the first half of the year.

Assuming that you'll have -- it appears given the backlog and the backlog ASP, you have still a decent I would expect at least low double-digit revenue growth in the quarter, can we still expect year-over-year leverage?

That would be our expectation, yes.

Great.

Thank you.

David Williams, Williams Financial Group.

I wanted to see if you might be able to shed a little color on what you're seeing in maybe some of the A-minus and maybe B communities.

You guys seem to have a little better position maybe outside the city centers.

And just looking for a little commentary on what you're seeing as far as traffic in those areas.

We do count our traffic.

And I don't focus so much on the traffic as I do the hit ratio that our salespeople hit.

Because you can be in a great community with a lot of traffic, and if you don't have a salesperson who has what we call a high kill ratio then you're not going to have nearly as many sales.

So what we're focusing on is, is how many traffic units do they convert to contracts?

And generally speaking, our traffic was up in October as was our sales, and we'll continue to monitor that as we go forward.

Although in November and December, those are typically our slowest months of the fiscal year, just simply because of the holiday season.

And so we don't have any great expectations about November and December, but clearly we do have great expeditions about January, February and March.

Great.

Thanks.

And then secondly, just on your cycle times.

You had mentioned that those had become a little more elongated.

Can you frame that maybe with a little the days of change there?

It's not significant.

We're talking in terms of no more than a two or three week difference really over the last 12 to 18 months.

Still, the vast majority of our homes are constructed in the same ranges they always have but within the ranges they've shifted.

But no more than two to three weeks, but that's enough to move the needle a little bit for us.

And it's also being lengthened by our Emerald product line taking longer to construct.

And quite frankly, subs have been somewhat slow to grow their businesses simply because of the fact that they don't want to go back to 2005 and 2006.

They want to keep their businesses slightly smaller.

So there are times when we take the next subdivision to a framer or an electrician or a plumber and they say, well, take it to somebody else.

And so we've had to, in certain instances, look for other subs to backfill our existing sub base simply because they've been through the merry-go-round once before and they don't want to go down the hill again.

Thanks.

Appreciate the color.

Jade Rahmani, KBW.

I just wanted to find out on the options walkaway costs, that was a pick up sequentially.

And wanted to ask if you expect that to trend higher driven by any change in your view on some of the deals that you currently have under contract?

We evaluate each one of those deals on a weekly and even a daily basis, because all of those land contracts whether they be option or all cash purchases come up here.

And we are evaluating what our performance has been in the subdivision, in terms of gross margins, and what our absorptions have been relative to our next take, takedown requirements.

And if we believe that we have adequate lots and we don't want to do the next takedown, we try to extend the contract.

But we're not going to bank lots in a deal where we're making marginal gross margins.

The cheaper route is to close it down, go someplace else, redeploy our capital where we can achieve a higher ROI.

Just directionally, Jade, that was our highest number for a while.

So directionally on average, we would expect that to probably come down going forward.

But it will be lumpy.

Those decisions don't happen on a normal basis.

They happen basically at a decision point where we have to make a go forward or not go forward decision.

And frankly it factors on a division by division, city by city, market by market basis, all relative to what we're doing in that market in terms of returns.

And how much capital we want to commit to that market, and where we can redeploy that capital if we can get a higher return.

And in addition to the takedown timeline, is pricing also up for negotiation?

Or renegotiation?

Absolutely.

I sent an e-mail out to all of our regional presidents and division presidents probably four or five months ago and said hey, the land market is slowing down.

Now is a good time to go back and see if we can get some of the lot price back, the negotiation downward into the sales price of the lot.

And sometimes we're successful, sometimes we're not.

But as I love D.R.'s comment, you never know till you ask.

Yes, these write-offs reflect after we've gone through every other possibility.

Whether it's delaying the takes, reducing the takes adjusting the price, it's all of those things.

We'd score all of those things before we determine that we're not going to move forward.

Great.

Thanks.

And then just on the cancellation rate, do you have a sense for how much of that was normal seasonality?

I think historically in the fourth quarter the cancellation rate does tend to pick up.

We've seen a little bit of that in the past, but I believe it was more driven by just the general adjustment that potential home buyers were going through.

We saw a little bit of that towards the end of Q3, and then that continued on into Q4.

We didn't necessarily comment on it, because one month is a little difficult to measure in terms of can rates, but we did see our can rate come back down a bit in the month of October when we saw a little bit better sales.

But an important point, just because we can someone because all of a sudden they couldn't qualify under the existing mortgage we have what we call home buyers club.

And those people will go into that club, or we'll keep them on the list.

And one of two ways, we're going to still try to figure out how to put them in a home, house price, or a rate that they can afford.

And just because they can't qualify at a specific rate, at the current sales price, they might elect and we might be able to get them in a slightly smaller home.

The bottom line is, get them in a home today.

Let them experience that appreciation so they have something some basis on their money to get the appreciation, and be able to be a future buyer of another home perhaps the one they couldn't afford today, three or four years out.

Great.

Thank you very much.

Alex Barren, Housing Research Center.

Great job on the year.

I wanted to ask about that acquisition that you did.

What was the timing?

Was it at the beginning of this quarter?

Or just very recently?

And how many homes did those guys deliver last year?

That acquisition occurred in the first week of October it closed.

And they closed probably about 400 homes in the 12 months leading up to that.

Okay.

Got it.

And with regards to your tax rate this quarter, obviously, I think throughout this year you guys have been reversing part of the remaining DTA.

Was there some of that this quarter, and what is your remaining DTA valuation allowance?

Yes.

We have been seeing some of that activity and valuation allowance and other -- there's other tax adjustments that occur in the fourth quarter.

We'll have full disclosure around all of our tax balances, DTA valuation allowances, and everything in our 10-K.

I don't have all the details here in front of me today, but we'll have all of those in our 10-K that we'll file here in a week or so.

Got it.

And Don, I guess in your comments about you're not -- you're saying you're not becoming what was the word you used?

Well you said that you would evaluate what goes on in the next few months.

Are you seeing anybody that is kind of acting irrational?

In your view?

No.

Not really.

Clearly as builders approach their fiscal year-end, certain builders, they begin to offer incentives to hit their expected or desired closings or sales for the year.

And so you always have that, Alex, and this all depends up on what month their fiscal year ends.

So, yes, we experienced some of that a couple months ago.

But generally speaking, I think people are acting rational.

And frankly, over the course of the last 18 months or so, most of us have been, I wouldn't call it struggling, but we've been striving to meet the demand in the marketplace and been experiencing good pricing.

And I think everybody industry should be glad to be back to decent demand, and decent margin, and decent pretax income possibilities on a go-forward basis.

So right now, everybody's playing in the sandbox pretty well.

Sounds good.

Thanks.

Jack Maseko, SIG.

In regards to the home buyer club that you talked about a few questions ago, one of the things we've seen is the private mortgage insurers have begun to thaw out a little bit and move a little bit further down FICO.

And at least one is now writing in MI down to the 620 level, and I'm curious if you've begun to see any of that out of the mortgage company and expanding the buyer pace on entry-level side?

And if that's something I think you'd said 720-ish was the average FICO for the quarter.

Where was that number back in more normalized times 2003, 2004, 2002 timeframe?

I'm trying to get a sense of how much buyer pool opening up that could possibly be?

In reverse order, the FICO store was about 723 this quarter.

Historically, we would have expected something closer to 710.

So not a huge difference from where we are today.

In terms of the MI product and expanded pool of buyers, we are not hearing anything significant about that.

I can ask our mortgage company if you'd like me to, and we can follow back up with you.

Okay.

Great.

And then have you -- the recent reports talking about some of the builders selling some closeout homes to some of the REIT's.

Are you active in any of that on the closeout side, or some of the specs that maybe you've hung around the past or is that something you looked at in the past?

Absolutely not.

All right.

Perfect.

Thank you.

No interest whatsoever.

Great.

Thanks.

Jim Krapfel, Morningstar.

You mentioned walking away from option lands.

Does that increased flexibility and just general experience during the downturn cause you to rethink your land spend next going forward towards more options?

Well, we would like to do 100% options if we could, but there are markets where we cannot and simply because the developers aren't large enough or there aren't enough people well-capitalized enough to provide us our lots on a timely basis and a cost effective basis.

So frankly, right now, if you take a right now if you take a look at our finished lots.

We have about half of them we own and about half of them that were options, and that's probably a pretty normal percentage for us.

Like I said, ti would be nice to have 100% options with $100 earnest money up on each contract, but that's not feasible.

Do you see the supply of optioned land coming back any time in the next couple years?

Actually I don't.

I think what we've focused on over the course of the past 18 months is the reason we've stepped up our land spend over the last 18 months there for a while was because there weren't option lots available, and so therefore we needed to get back in the business of being a land developer to provide us the necessary lots to meet the demand.

And it just varies by market by market.

I do know one thing.

Right now, the banks are reluctant to lend on a very favorable basis to private developers to the extent that many of them are requiring 50% equity in the deal to develop the lots.

So for a large boulder like ourselves, well-capitalized, we're in a preeminent position to be able to be a developer and provide ourselves lots at are cost-effective and timely basis.

Okay.

And then second question, what were your selling prices per square foot in closings and new orders?

I think we have that information available on the closings.

We probably don't have it on the sales.

Bill is flipping right now.

We don't have that readily available.

Why don't we go ahead and get back to them.

Yes.

We'll follow back up with you, Jim.

Okay.

All right.

Thank you.

Robert Wetenhall, RBC Capital Markets.

This is actually Desi filling in for Bob.

In the financial services business, you highlighted that the competitive environment has become less favorable.

Did you start to see the shift in prior quarters, or was it the first quarter just really impacted you?

Can you restate your question please?

Sure.

So in the financial services business, you highlighted that the competitive environment had become less favorable during the quarter.

Did you see that in prior quarters, or was this really the first time that impacted you?

This was the first quarter that it really showed up in our operating margin.

So you saw us running from around a 40% operating margin to a lower level this quarter.

Basically, there's a lot of capacity in the mortgage origination business right now.

Re-fis have dwindled as rates moved up, and so those there's more competition for the business that's still available.

Would you say the current environment is normal, or do you still see it as favorable relative to historical trends?

This quarter probably falls right in the middle of what we would consider a normalized historical trend.

Susan Berliner, JPMorgan.

I just wanted to get a little more detail if you can with regards to the markets.

And I know you've talked about the regions, the West being really strong.

But I was wondering if you could talk about any specific markets that are showing any slowdown, and highlight those markets that are doing really well?

Well, I've been reluctant to do that for a long time, and I apologize.

I know that we have one of our competitors who seems to walk through and rate each market, and I always wait for their rating of their markets.

I hate to give any specific color to you on that, because we're very -- we like to focus on our own markets, and we don't like to give our competitors any indication of where we've got stronger or weaker markets.

So I would apologize, but I'd just prefer not to answer that question.

Okay.

Thank you.

That does conclude our question-and-answer session.

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

Kevin, thank you very much for being a great moderator.

We always appreciate having you on our call.

To all of our D.R. Horton e employees, we've come a long way, as the Virginia Slims commercial says since the 2007, 2008, 2009 and period.

You've turned in a stellar year for us, and FY13.

We're looking forward to the same, and better obviously in FY14.

And we're optimistic with our existing land position that we bought over the last two to three years, and with us bringing those projects into development, and we believe we're looking forward to being able to maintain and increase our gross margins in the year ahead.

And we're looking forward to increased demand in FY14 over 2013.

So thank you very much, and God bless.

Thank you.

That does conclude today's teleconference.

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

We thank you for your participation today.