霍頓房屋 (DHI) 2016 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter and fiscal year-end 2016 earnings conference call of D.R. Horton, America's Builder, the largest builder in the United States.

(Operator Instructions).

As a reminder, this conference is being recorded.

I will now turn the floor over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

Please go ahead.

Thank you, Kevin and good morning.

Welcome to our call to discuss our fourth-quarter and fiscal 2016 financial results.

Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

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

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

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

This morning's earnings release can be found on our website at investor.drhorton.com and we plan to file our 10-K next week.

After the conclusion of the call, we will post updated supplementary historical data to our investor relations site on the presentations section under news and events for your reference.

The supplementary information includes current and historical data on our homebuilding return on inventory, gross margins, changes in active selling communities, product mix and our mortgage operations.

Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica and good morning.

In addition to Jessica, I am pleased to be joined on the call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer.

Our D.R. Horton team finished strong in 2016.

Pretax income for the fourth quarter increased 28% to $433 million on $3.7 billion of revenue and our pretax operating margin improved 90 basis points to 11.6%.

For the year, we delivered results in line with our original guidance we shared last summer with consolidated pretax income increasing 20% to $1.4 billion on $12.2 billion of revenue.

We closed 40,309 homes this year, which is an increase of 3,661 homes or 10% over last year.

Our consolidated pretax margin for the full year of 2016 improved 70 basis points to 11.1%.

Our return on inventory improved 260 basis points in 2016 to 15.4%.

During the fourth quarter, we generated $529 million of cash from operations bringing our total cash generated from operations to $618 million for the year and to $1.3 billion over the past two years.

These results reflect consistent strong performance across our broad geographic footprint and diverse product offerings.

Our continued strategic focus is to produce double-digit annual growth in both our revenue and pretax profits while generating positive cash flows and improved returns.

With a sales backlog of 11,475 homes at the end of September, positive sales trends in October, a well-stocked supply of land, lots and homes and the launch of our Freedom Homes brand, we are well-positioned and looking forward to 2017.

Bill.

Net income for the fourth quarter increased 19% to $284 million, or $0.75 per diluted share, compared to $239 million, or $0.64 per diluted share in the year-ago quarter.

Our consolidated pretax income increased 28% to $433 million in the fourth quarter compared to $339 million in the year-ago quarter.

And homebuilding pretax income increased 34% to $405 million compared to $302 million in the prior-year quarter.

Our backlog conversion rate for the fourth quarter was 83%, near the high end of the range we guided to on our third-quarter call.

As a result, our fourth-quarter home sales revenues increased 19% to $3.6 billion on 12,247 homes closed, up from $3.1 billion on 10,576 homes closed in the year-ago quarter.

Our average closing price for the quarter was $297,000, up 3% compared to the prior year due to an increase in our average sales price per square foot.

Mike.

In the fourth quarter, our homes sold increased 3% to 8,744 homes.

On a 5% decline in our average active selling communities, our sales absorptions strongly improved by 8% over last year.

Absorptions were up in five of our six regions.

The value of our net sales orders in the fourth quarter increased 7% from the year-ago quarter to $2.6 billion.

Our average sales price on net sales orders increased 4% to $299,800.

Our fourth-quarter cancellation rate was 28%, in line with the year-ago quarter.

The value of our backlog increased 9% from a year ago to $3.4 billion with an average sales price per home of $299,600 and homes in backlog increased 8% to 11,475 homes.

We are very pleased with our current sales pace and October sales were in line with our fiscal 2017 business plan supporting our expectations for the year.

Jessica.

As announced during the fourth quarter, we are adding another brand to our product lineup, Freedom Homes, offering a low-maintenance lifestyle at an affordable price for active adult buyers who want to live in an age-restricted or age-targeted community.

Early customer response to Freedom Homes has been positive.

We are currently offering Freedom Homes in eight markets in seven states and expect to have Freedom communities open in at least a third of our 78 operating markets by the end of fiscal 2017.

As we work toward completion of our Express Homes rollout in fiscal 2017, we are excited about the expansion of Express into our western markets where customer response has been just as strong as in our early markets.

In the fourth quarter, entry-level homes marketed under our Express Homes brand accounted for 28% of our homes sold, 29% of homes closed and 20% of home sales revenue and for the year, they accounted for 27% of homes sold, 26% of homes closed and 18% of home sales revenue.

We also remain dedicated to offering homes for higher end, move-up and luxury buyers under both our D.R. Horton and Emerald Homes brands.

In the fourth quarter, homes priced greater than $500,000 were 7% of our homes closed and 19% of our home sales revenue and for the year, they accounted for 7% of homes closed and 17% of home sales revenue.

Mike.

Our gross profit margin on home sales revenue in the fourth quarter was 20.5%, up 20 basis points sequentially from the third quarter and up 60 basis points from the prior-year quarter.

The sequential improvement in our gross margin was primarily due to controlling cost increases while also reducing incentives or raising prices in communities where we are achieving our targeted absorptions.

In the current housing environment, we expect our gross margins to continue to remain in a relatively consistent range of 19% to 21% while balancing pace and price in each of our communities to optimize returns on our inventory investments.

We have been able to achieve a gross margin slightly higher than 20% over the last two quarters.

We may still experience quarterly fluctuations ranging from 19% to 21% due to product and geographic mix, purchase accounting and the relative impact of warranty, litigation and interest costs.

Bill.

In the fourth quarter, SG&A expense as a percentage of homebuilding revenues was 8.8%, flat with the prior-year quarter.

SG&A expense for the quarter included $15.5 million to write off an acquired trade name that we are no longer using and to increase our legal reserves for a recent court decision, which we plan to appeal.

Homebuilding SG&A for the full year improved 20 basis points to 9.3% compared to 9.5% in 2015 as our increased revenues improved the leverage of our fixed overhead costs.

We remain focused on controlling our SG&A while ensuring that infrastructure adequately supports our growth and we expect to further leverage our SG&A in 2017.

Jessica.

Financial services pretax income in the fourth quarter was $28 million.

For the year, financial services pretax income was $89.1 million on $296 million of revenues representing a 30% pretax operating margin.

Our financial services profits for the fourth quarter and fiscal year decreased from the prior year primarily due to an increase in our estimated loan loss reserves in the fourth quarter and increased overhead costs to comply with additional regulations.

94% of our mortgage company's loan originations during the fourth quarter related to homes closed by our homebuilding operations and our mortgage company handled the financing for 57% of our home buyers.

FHA and VA loans accounted for 48% of the mortgage company's volume compared to 50% in the year-ago quarter.

Borrowers originating loans with our mortgage company this quarter had an average FICO score of 718 and an average loan-to-value ratio of 89%.

David.

During the quarter, our total number of homes in inventory decreased by 9%, a normal seasonal trend after our strongest home-closing quarter of the year.

We finished the year with 23,100 homes in inventory, of which 1,600 were models; 11,800 of our total homes were spec homes with 8,300 in various stages of construction and 3,500 completed.

Compared to a year ago, we have 17% more homes in inventory, which places us in a strong position at the start of the year to achieve double-digit growth in revenues in 2017.

Our fourth-quarter investment in lots, land and development totaled $747 million, of which $467 million was to replenish finished lots and land and $280 million was for land development.

For the year, our total investment totaled $2.7 billion, an increase of 23% from 2015.

We plan to increase our investments to replenish our land and lot supply in 2017 at a rate to support our expected growth in revenues.

Mike.

At September 30, 2016, our land and lot portfolio consisted of 205,000 lots, of which 113,000 or 55% are owned and 92,000, or 45% are controlled through option contracts.

75,000 of our total lots control are finished, of which 30,000 are owned and 45,000 are optioned.

Consistent with our focus on building strong relationships with land developers, our option lot position has increased 65% from a year ago while our overall lot position increased 18%.

Our 205,000 lot portfolio is a strong competitive advantage in the current housing market and sufficient lot supply supports solid growth in both sales and closings.

Bill.

Our inactive land held for development of $138 million at the end of the year represents 7,300 lots, down 20% from June and down 34% from a year ago.

We continue to work through each of our remaining inactive land parcels to improve cash flows and returns and we expect that our land held for development will continue to decline.

During the fourth quarter, we recorded $4 million in land option charges for write-offs of earnest money deposits and due diligence costs for projects that we do not intend to pursue.

We also recorded $11.4 million of inventory impairment charges, the majority of which were in our Southwest and East regions.

These charges primarily related to strategic decisions to sell land.

We will continue to evaluate our inventories for potential impairment, which may result in future impairment charges, but the timing and magnitude of these charges will fluctuate.

During the fourth quarter, we also recorded a goodwill impairment charge of $7.2 million related to one of our operating divisions in our Southeast region.

Our total goodwill balance after this impairment is $80 million.

Mike.

In September, we acquired the homebuilding operations of Wilson Parker Homes for $91.9 million of cash, which includes a holdback payment and an estimated postclosing adjustment.

Wilson Parker primarily operates in Atlanta and Augusta, Georgia and Raleigh, North Carolina.

The assets acquired included approximately 380 homes in inventory, 490 lots and control of approximately 1,850 additional lots through option contracts.

We also acquired a sales order backlog of 308 homes valued at $74.1 million.

Our fourth-quarter results include 66 net sales orders and 81 homes closed from Wilson Parker subsequent to the acquisition date.

Bill.

During the fourth quarter, we generated $529 million of cash flow from operations.

For the full year, we generated $618 million, above the high end of our guidance range.

At September 30, our homebuilding liquidity included $1.3 billion of unrestricted homebuilding cash and $882 million of available capacity on our revolving credit facility.

Our homebuilding leverage improved 690 basis points from a year ago to 29.2%.

The balance of our public notes outstanding at September 30 was $2.8 billion and we have a total of $350 million of senior notes that will mature in fiscal 2017.

We finished the year with a shareholders' equity balance of $6.8 billion and book value per common share of $18.21, up 14% from a year ago.

Our priorities for cash flow utilization center around being opportunistic while remaining disciplined.

Our top priorities for fiscal 2017 include investing in our homebuilding business where opportunities to generate acceptable returns exist; business acquisitions to further consolidate marketshare; paying off debt and maturity and consistent dividends to shareholders.

Based on our solid balance sheet, liquidity, profitability and cash flows, our Board of Directors increased our quarterly cash dividend by 25% to $0.10 per share.

We currently expect to distribute approximately $150 million in dividends to our shareholders during fiscal 2017.

Jessica.

Looking forward, our expectations for next year are consistent with what we shared on our July call and are based on today's housing market conditions.

In fiscal 2017, we still expect to generate a consolidated pretax margin of 11.2% to 11.5%.

We also expect to generate consolidated revenues of between $13.4 billion and $13.8 billion and to close between 43,500 and 45,500 homes.

We anticipate our home sales gross margin for the full year of fiscal 2017 will be around 20% with potential quarterly fluctuations that may range from 19% to 21%.

We estimate that our annual homebuilding SG&A expense will be approximately 9.0% with the first two quarters of the year higher than 9% and the third and fourth quarters lower than 9%.

We expect our annual financial services operating margin to be around 30% with the first two quarters of the year lower than 30% and the third and fourth quarters higher than 30%.

We are forecasting a fiscal 2017 income tax rate of approximately 35% and an annual average diluted share count of approximately 380 million shares.

We also continue to expect to generate positive cash flow from operations for the third consecutive year in a range of approximately $300 million to $500 million.

Our fiscal 2017 results will be significantly impacted by the spring selling season and we plan to update our expectations as necessary each quarter as visibility to the spring and the full year becomes clearer.

For the first fiscal quarter of 2017, we expect that our number of homes closed will approximate a beginning backlog conversion rate in a range of 76% to 80%.

We anticipate our first-quarter home sales gross margin will be around 20% and we expect our homebuilding SG&A in the first quarter to be in the range of 10% to 10.2% of homebuilding revenues.

David.

In closing, the strength of our team and operating platform across the country allowed us to deliver full-year 2016 results in line with the guidance we provided at the start of last year while growing our revenue and pretax profit at a double-digit pace again this year.

We generated $618 million of positive cash flow from operations and improved our annual return on inventory by 260 basis points to 15.4%.

We remain focused on growing both our revenue and pretax profits at a double-digit annual pace while continuing to generate positive cash flows and improved returns.

We are well-positioned to do so with our solid balance sheet, industry-leading marketshare, broad geographic footprint, diversified product offerings across our D.R. Horton, Emerald, Express and Freedom brands, attractive finished lot and land position and, most importantly, our outstanding team across the country.

We would like to thank all of our employees for their hard work and remarkable accomplishments this year and we look forward to working together to continue growing and improving our operations in 2017.

This concludes our prepared remarks.

We will now host questions.

Thank you.

(Operator Instructions).

Alan Ratner, Zelman & Associates.

Good morning.

Thanks for taking my questions.

I guess my first question, just thinking about the job you guys have done on the entry level and you guys have had a tremendous first-mover advantage there over the last year or two and as I listened to all the other builders on the conference calls this quarter, almost everybody is talking about entry level, increasing their exposure there, opening new communities.

And when I look at your order numbers this quarter, which came in lower than where you've been trending in recent quarters, curious if you are seeing any increased competition there that might have affected that sales pace, maybe some more incentives as calendar reporting quarter builders gear up for some closings there?

With your guidance staying unchanged, it sounds like October bounced back.

So any more color you can give on the sales pace and the competition you are seeing on entry level would be great.

Thank you.

Alan, from a competitive standpoint, I feel like we are as well or better positioned today as we were starting last year.

So I think it's -- fourth-quarter sales number, we just had a lot going on and a tough comp the year before and it was right in the -- put us right in where we thought we would be for the year.

So if we look at October, October looks good.

Got it.

I appreciate that, David.

And then I think you mentioned -- I might have misheard this -- your community count was down about 5% year-over-year, if that was correct.

And I know you've been talking about that growth resuming there to something more in the low to mid-single digit range.

So just curious if that came in below your expectations in the quarter and when you would expect to see that inflect positively.

Hi, Alan.

You are correct.

Our community count was down 5% year-over-year and it was down 2% sequentially.

It's one of the hardest things for us to predict, so we don't give formal guidance on community count.

As we continue to get more information and we are into November of the year, right now, we expect our community count to be relatively stable versus the current levels, which would infer that it would continue to be down on a year-over-year basis in somewhere of a low to mid-single digit range like we experienced this quarter.

Alan, this is David.

Our expectation is double-digit growth and I can tell you that the operating plan going forward supports the guidance we've given you.

So the expectation doesn't end next year.

And our targets are all based on an annual basis, so we're really focused on that double-digit growth in revenues and pretax profits annually.

Quarter-to-quarter, you have some variation.

Ken Zener, KeyBanc.

Good morning, everybody.

So the can rate normally creeps up in the fourth quarter, consistent with what we saw last year, but I'm just trying to tease out labor constraints and all these types of things because it seems like, while you refer to backlog conversion, if you use your units under construction ratio, you are actually coming in a bit lower closings as a percentage of units under construction than you normally do.

Is there something that's impacting that trend?

It seems like you would have had perhaps more units -- I'm not sure.

You need to comment on that.

We hit the high end of our guidance range, so I would say we delivered on what we anticipated and we are excited about the fact we have 17% more homes under construction today going into the year to position us very well to deliver on those targets for 2017.

But Q4 was right in line with the guidance we gave.

No, I'm saying for 1Q.

[That] our 76% to 80% backlog conversion -- it's about in line with what we experienced last year and what we expect to do in Q1, which is a nice increase on a year-over-year basis in terms of absolute units.

Last year Q1, in fiscal 2016 Q1 was a 76% backlog conversion rate and with this implied conversion rate, that would imply high single digit to low double-digit growth in Q1 versus last year.

Okay.

I will follow up on that.

For the order pace, which we look at seasonally for you all, it seemed like it came in just a little lighter than your normal seasonality and I need to see your supplemental today, but certainly compared to 2015, 2014 and 2013, it was a little lower.

Was there any one region that was driving that?

And I know in your supplemental, you will have that.

I just wonder if you could publicly comment on that before the supplemental comes out.

Well, we commented that five of six of our regions were up in terms of absorptions and so really, no, there wasn't really one region that sticks out at all.

We are making sure that this time of the year that we are positioning ourselves with our inventory levels and community by community to be prepared to deliver on what we are going to do next year and in each community, they delivered the closings that we expected in the quarter and we are in the position we expected to be to deliver fiscal 2017.

And the only region we were down in was our Southwest region, which is our smallest operating region.

It's only a couple of markets, the biggest one being Phoenix, which we've talked about the last couple of quarters.

We are repositioning and are excited about introducing Express into that market.

So we do expect our absorptions to start to pick up, but this quarter, that was the only region that we saw a decline in our absorption.

So very excited with what we continue to see across the country.

Stephen East, Wells Fargo.

Thank you.

Good morning.

Just one last question on the orders front -- or a couple questions on the orders front.

Could you quantify to some degree what October looks like, maybe either in percentage terms or versus the fiscal fourth quarter?

And then when you look at the fiscal fourth quarter, it was the easiest comp that you had of the year and you had some pretty good growth rates the prior quarters.

As you look at the market, what do you think was changing versus maybe the last two or three quarters, the growth rates that you posted?

Stephen, with regard to our October sales, we feel really good about our October sales.

We were up over the prior year, in line with where we thought we'd be and it's definitely supporting the outlook we had for the year.

In terms of underlying market factors, we are not seeing significant changes.

We continue to see both in looking at the numbers, as well as talking with field, visiting the field operations, continued strong demand across the brands and we are not in any way alarmed.

We are, in fact, very encouraged and positive about the way 2017 looks and our positioning for 2017.

Okay.

And then the second question I had for you, your lot option strategy, you put a lot more under option.

As you look at moving forward, I assume you prefer to continue to do that.

But as you look at the market in actuality, what's that market giving you?

Can you grow that percentage of options meaningfully in 2017, or was this something that was just opportunistic that came through?

And then could you just talk a little bit about what the trademark was and why that transpired?

Stephen, with regard to the option contracts, we did see tremendous progress we've been making in that program.

It's not any one opportunistic situation.

It's been market-by-market, operating division-by-operating division, working with local developers to improve our option lot portfolio.

We made a 65% increase this year over last year.

I don't think we will see that kind of growth going forward in the option position, but I do think we are going to get it closer to a 50/50 balance from our 55/45 balance owned option today.

I will let Bill talk to the trade name.

Stephen, with respect to the trade name, this related to one of the acquisitions that we did two or three years ago.

We have recently changed over all of those communities to our core brands, to our Horton Express brands and so we are no longer using that name and so we wrote off the remaining balance that had not yet been amortized.

So pretty ordinary course of business as we integrate acquisitions over the years following the acquisition date.

And Stephen, on this lot option program, we are just being good partners for the people that have the ability to put lots on the ground, and when we look at our driving philosophy on flag-by-flag, month-by-month absorptions, that makes underwriting land and lot option contracts a much easier program for the people that are borrowing money to put the lots on (inaudible).

So we are just being nicer and we are going to continue to be nice.

Nishu Sood, Deutsche Bank.

This is actually Tim Daley on for Nishu.

Thanks for taking my question.

My first question is regarding the backlog conversion ratio.

So it seemed to be up year-over-year in the fourth quarter and you're guiding for it to be up in the first quarter 2017 as well.

So some of your peers have been mentioning labor shortages being a tailwind or a headwind to this metric rather, but it doesn't seem to be the case for you in 4Q and apparently not in 1Q.

I just wanted to dig a little bit into this mainly regarding the Express versus the D.R. Horton brand communities just because assuming that the Express communities have a bit quicker cycle times, could you just explain a bit of this mix to us and what do you expect trending into 2017?

Thank you.

So a lot there in that question.

Let me try to take some parts of it.

Looking at labor, certainly labor is tight across the markets.

We feel that our market positioning, the leading market positions that we have give us access to great labor partners and we're able to provide a lot of work for those.

As David mentioned before, running a consistent absorption space community by community helps us in negotiating and giving that labor a secure place to go to work every day.

But we do hear that our guys are working very hard every day to secure adequate labor, provide quality homes.

And we monitor our build times brand by brand and that would be the best way we would have to see if we are having a global impact of labor shortages in our deliveries and we are not seeing our build times really lengthen or cycle times extend for how long it takes us to build a house.

So we are very pleased.

Our guys are doing a great job -- and gals -- are doing a great job performing in that regard.

And, Tim, in addition to being very focused on building that option lot position, we have a focus on improving our backlog conversion and that's what you are starting to see come through.

A big part of that is our Express brand, but we are doing better in Horton as well and are going to continue to try to drive a better backlog conversion as we move forward, although there can be some choppiness to that from quarter to quarter as well.

Okay.

Just quickly, just to clarify.

So was both Express and Horton up year-over-year on a backlog conversion by brand percentage in the fourth quarter?

We don't have that in front of us right now, Tim, but I will be happy to take a look at it and get back to you.

All right.

No problem.

Thank you though.

My second question, just digging a bit into the margin guidance for financial services revenue, seems to be -- it's down year-over-year from 2016 to 2015 and you essentially are expecting it to be flat in 2017.

What was the main factor that influenced the reduction year-over-year into 2016 and what gives you the confidence that these margins will stabilize into 2017?

Really two primary things, Tim.

Last year, we saw abnormally high margins in the financial services business as the industry started to price in a lot of the extra costs that were coming related to regulations and this year, those costs came in.

So we saw a significant increase in compliance costs in our business there as we implemented all the new rules and regulations and that's certainly impacted our overhead costs there as well.

And then one other big factor for us more specifically, we did have an incremental increase in our reserves for our loan portfolio in fiscal 2016 and in fiscal 2015, we actually had reductions in those reserves.

So you had an opposite effect in our overall margins in the business 2015 versus 2016.

But really the run rate of around 30% has been historically a very normal operating range for financial services, so we feel like in fiscal 2017 we should be back about to a normal level.

Stephen Kim, Evercore.

Thanks very much.

You've reiterated your outlook for double-digit growth and I guess I just wanted to make sure -- does that include an assumption for ASP growth?

And in that vein, I was wondering if you could give us a little more clarity as to whether the community count growth in the quarter was more hampered at high-end communities, or lower-end communities, or were there any particular regions that stand out in terms of where you are having a little bit more of a harder time than others in growing that community count.

Thanks.

Stephen, as you look at our guidance for next year, our unit growth, the range there is an 8% to 13% growth and the revenue number is 10% to 14% growth, so there would be very slight assumption of price appreciation, which is about what we've seen, very low single digit at best.

So not much, but a little bit.

And then the second part --.

Yes, in terms of our community count, we have seen that decline pretty much across the board, which is what caused our 5% decline on a year-over-year basis on an average basis.

It's in line with what our business plan looks like and we continue to drive better absorptions out of the vast majority of our communities, which is why we continue to see our sales improvement and the majority of our business plan in fiscal 2017 is just like 2016.

We do expect to continue to drive better absorption out of the majority of our flags.

Express will continue to help us with doing that and the launch and the beginning rollout of Freedom Homes, which is a very similar business model to Express, is going to help as well.

Absolutely.

Great.

I guess the second question --.

Stephen, our long-term goal is double-digit growth, so we are going to be positioning to maximize our returns generating double-digit growth.

So the community count is going to balance out.

As our absorptions have picked up, it's come down, but as a cycle in the market, we will be adding communities to support that growth.

Great.

That's encouraging.

With respect to the cycle, I was wondering if you could comment on one other issue, which relates to a build-to-order versus more of a spec model approach to the production.

We've heard some people say that a build-to-order model has certain advantages and I was curious if you could comment on your opinion generally as to the advantages of a spec model versus a build-to-order and if there's any perspective on where we are in the cycle that might inform your bias one way or the other?

Well, to me, build-to-order spec depends on where you are in a cycle and what is the biggest constraint in a market.

If selling the house is the biggest constraint then you are going to do whatever the buyers want you to do, which is you enter that build-to-order model.

But if labor is the biggest constraint, if location and land position is the biggest constraint, then you are trying to create the most efficiency you can and best value you can for the buyer and that is a production start spec model.

And if you look at our margins over the last two years, three years, they are the most stable in the industry and it is because we are very disciplined in when we start, when we sell and when we close these homes and create the most efficient -- maximize the labor trade that we have and that's why we are doing a better job than our competitors out there.

Michael Rehaut, JPMorgan.

Good morning.

It's Jason in for Mike.

Was hoping you could give a little more color on the pricing and incentive trends that you saw as they occurred through the quarter across the different productlines.

How much is your pricing up versus your land and construction costs and in which markets do you currently have the most pricing power right now as you are looking across your footprint?

We continue to see a nice increase in our revenues per square foot, Jason.

They were up about 4% both year-over-year and sequentially and our costs both year-over-year and sequentially were only up about 2%.

So that is part of the gross margin pickup you are seeing being offset by slightly higher land costs flowing through, but really it's across the board.

You've continued to see our Express price point move up primarily driven by a change in mix as we roll in some of those Western markets I mentioned in the scripted comments, but we do have pricing power out there today because there is a lack of inventory, particularly at those entry-level price points.

And right now, Jason, we continue to see very consistent margins across all of our brands.

They are all within a very tight range around our Company average, so no major differential in margins, cost or pricing dynamics really in any of our brands right now.

Okay, great.

In terms of the gross margin, obviously a nice improvement from last year.

Wanted to see how much of that was driven by mix from a geographic or a product standpoint.

And then as you have been underwriting new land deals, have you been able to maintain a consistent underwriting standard, or have there been any adjustments as you look across the platform?

We really haven't seen a big differentiator in the driver of margin.

We've seen general improvement across the platform.

And as David mentioned before, or Bill, our brands have produced very consistent margins close to the Company average.

With regard to our underwriting hurdles, we've maintained the same underwriting hurdles we've had and our primary focus is the return on the inventory investment that we will have in a community and a return of the initial committed capital of 24 months that we've been talking about for a few years now.

So we've been able to maintain those disciplines and still invest significantly in replenishing our land and lot supply.

John Lovallo, Merrill Lynch.

Thanks for taking my call.

The first question I had was just on South Central orders being down slightly year-over-year.

I was wondering if you could just give us a little bit more color by major city in Texas.

Overall, Texas has been strong for several years now and especially the Dallas-Fort Worth area certainly stands out, continues to be a very strong level.

Certainly the growth rate has moderated versus where we were, but still maintaining at a very strong level.

Our sales in Houston, the second largest in Texas, was up year-over-year so we've continued to see that at a very strong level as we continue to move down the price curve and making sure that we are staying at an affordable level in the Houston market.

Austin and San Antonio, the other two major markets also just very solid, consistent results and when you are comparing versus where those cities and where the state of Texas was last year, that's at a very strong level of performance.

Okay.

That's helpful.

And then if we think about the gross margin, just curious what you are expecting in terms of purchase accounting impact from Wilson?

Very minimal.

As you look at our supplementary information, we've had really no quarters more than about a 10 to 20 basis point impact and certainly don't expect any more than that going forward as well.

Jack Micenko, SIG.

Good morning.

On the mortgage side, I think you had said a 57% capture and a 48% FHA/VA for the Company overall, right?

Wondering if you can break that out a little bit more on Express.

Are you capturing more of the Express buyer and I know there's been obviously some loan limit issues across the country, but is your FHA percentage higher at Express, or lower than the Company average?

Sure, Jack.

The FHA percentage is higher.

I don't have the specific number in front of me and I don't have the capture rate for Express in front of me, but I do believe it's higher than the Company average as well.

I will be happy to take a look at that and get back to you after the call.

Okay.

And then switching over to Freedom, I would imagine that's obviously a different buyer profile, so how are they financing?

Is it heavier cash?

Is it too soon to tell, or is there anything noteworthy out of the Freedom buyer in terms of how they are paying for the homes?

I think generally we are pretty early with that launch to have any kind of generalizations to say what that buyer has been doing.

We did see in a lot of our Express communities in Florida a lot of that buyer profile coming in with either very significant down payments, low mortgages or even cash buyers.

So we are excited to see how that unfolds, but we will have to get back with you as we see that happen.

Susan Maklari, UBS.

Thank you.

Just further on the mortgage market, we saw from the Fed yesterday their loan officer survey that perhaps there has been some modest or moderate loosening in terms of mortgage lending.

Is that something that you would say that you have seen especially maybe among that Express buyer?

To the extent there has been any loosening, it's been very modest, really similar to what we've said the last couple of years.

Any loosening has been very modest, nothing that has moved the needle significantly in the market, but we would certainly expect that, over time, probably we would continue to see a little bit more loosening as the economy improves, as the mortgage market continues to improve.

Okay.

And then in terms of thinking about the geographic footprint and maybe expanding in certain markets on the back of the Wilson acquisition, are there any areas that you feel like maybe you are perhaps relatively underrepresented in and would be interested in further expanding?

That's something we look at regularly.

We have talked a bit internally that we've been working to improve our operations in the Northeast and feel like we are making good progress there and over the next couple of years, we think we are going to see some good results there, as well in our Southwest.

The Phoenix market is starting to come back a little bit, so we've been making some more investments there and increasing our community counts there so would expect us to see some pickup in our Southwest as well and beyond that, we look at potential business acquisitions; we look at potential market startups, but we don't have anything new to announce there at the moment.

Eric Bosshard, Cleveland Research Company.

Good morning.

Two things.

Curious, first of all, on where we are in the cycle; how you are thinking about managing your land investment.

Obviously heard your comments about optioned land, but curious how you are thinking about managing through that at this point.

And then, secondly, you talked about Freedom becoming one-third of the market -- in one-third of your markets by the end of the year.

Curious how -- if that is incremental to what you're doing with Express, if that's going to take lots from Express or if we should expect for that price point or that piece of your business to grow even incrementally from where you are with Express.

Well, from the Express, Freedom standpoint, we are not thinking this is just going to replace Express positions.

We do believe this Freedom brand is a good vehicle to drive growth and support our double-digit growth across the Company.

And the rollout, the flag count -- I'm sorry, what was the other question?

Cycle, where we are at in the cycle.

Oh, cycle.

Well, I think we've got a good 2017, positioned for it and in my travels, Mike's travels, Don Horton's travels, the feeling in the market, the attitude, the excitement of our people, 2017 feels like it's going to be a very good year for us.

And beyond that, from a land positioning standpoint, we are replacing lots and we are expanding where we are driving higher returns.

And we are going to continue to do that.

If I could just follow up on that, how much of that is the market and how much of that is that you have positioned yourself optimally to participate in what feels like is the strongest piece of the market?

Can you differentiate between that?

It's not just the Express market that feels good right now.

It's the -- the Horton brand feels good.

We've gotten a lot better at executing our Emerald offering, product offering and I guess I've spent the month of September driving the Carolinas in looking at our flags, talking to our people.

We've got a business plan for the Carolinas.

I would be very surprised if they don't exceed that plan significantly.

So we say it -- I say it all the time.

It's just good to be us.

I don't have -- obviously, we can't operate in a vacuum so the overall market is strong, but we are so well-positioned today that it really is just good to be D.R. Horton.

Megan McGrath, MKM Partners.

Good morning.

Just wanted to follow up a little bit on the cost side.

You mentioned controlling your costs better and that was part of your outperformance on the gross margin.

So just curious if you could give any more color on that.

Is it pushing back against the suppliers more in terms of price increases, or is it more operational in nature?

Would love some more color on detail on how you are controlling your costs in this environment.

Megan, what we've been doing is we've been working with national trade accounts.

We've been working with suppliers in that regard to optimize our buying efficiencies.

We've been with large marketshares in many of our markets, most of our markets, we are able to work with labor and get very competitive pricing there.

But we are also looking at ways to be more efficient, executing a business plan in a neighborhood that drives an absorption rate that allows for the suppliers and the labor partners to be efficient with their business and give us pricing that is reflective of that efficiency.

At the same time, we've been able to reduce incentives or raise prices once we achieve those absorption paces and I think those two factors have been very helpful to our margins over the past few quarters.

They were very, very flat for several quarters in a row and we are starting to see some of the benefit of that execution and that discipline we've had in the field.

Okay, great.

That's helpful.

I apologize if I missed this, but can you give us an update on the rollout of Express in California?

We are still in the early stages, but certainly our increase in community counts out there, Northern, Southern and Central California and so we expect that to be definitely a source of our growth in fiscal 2017.

Very excited about California.

Will Randow, Citigroup.

Good morning and thanks for taking my questions.

I just had a couple follow-ups from prior questions.

I guess first from a seasonality perspective, gross margin was actually up sequentially in this fourth quarter and that's not the historical trend where you are typically down 50 bps, so I guess can you talk about what type of price increases you were able to implement over the past quarter or so to drive that?

You mentioned in the prior question mix, but if you could talk a little bit more about that and what readthrough there is for your 2017 guidance for gross margins?

Stated differently, is 20% flat kind of a -- I will call it a lowball number, or how do you think about that?

So we've been very pleased, as we said in our scripted comments, with what we've been able to do the last couple of quarters.

It's really been a cumulative effect of our efforts and really just driving that consistent absorption to be able to increase our margins.

So when we look at 2017, we still do expect the biggest driver of our bottom line to be incremental SG&A leverage due to the higher volumes, but if the spring is good and we continue to meet and exceed our business plan, then there could be some upside to our gross margin.

Where we sit today, we feel comfortable saying it will be right around that 20% with some quarterly fluctuations that could be in the 19% to 21% range because there are some things outside of just price and land lot and labor and materials that can impact our gross margin, which is why we do continue to give you that slightly broader range and stick with around 20% for the full fiscal year, but we will update that, Will, as we continue to move throughout the year and have better visibility to the spring.

As a follow-up, if you could hit specifically on what percentage of communities got price this quarter and also share your inflation trends in the three buckets separately of lumber, labor and land.

Will, we don't really have that information as far as percentage where we raise price.

That's managed at the local level, but overall our revenue per square foot did go up 4.4% on a year-over-year basis and 3.7% on a sequential basis.

So we are clearly seeing a fair amount of price appreciation in a fair sample of our communities across our business today and to the extent that it's there and we've got the opportunity to continue to do that or reduce incentives, we will continue to do that.

Buck Horne, Raymond James.

Thanks, good morning.

I wanted to go back to the spec home versus the to-be-built sale question just a little bit.

Just on an absolute count, it looks like your unsold units are up north of 20% year-on-year and on a per-community basis, you are probably up maybe closer to 25%.

Are you seeing a narrowing of the margin differential between specs and the contract sales to the point where that's what's giving you a lot more comfort to raise your unsold unit counts, or is this more a means to keep your labor more occupied and keep the trade base busy with the tightness in the labor market?

It's more the latter.

Community-by-community, we manage our inventory levels, manage our production in order to hit the production schedules and the sales pace that we are expecting going forward and we feel very good about our positioning right now.

When we look at our overall units and our completed units, they are right in line with our business plans.

In fact, when we look at our aging on those, which some of that information will be in our filings later on, our aging is actually improving so that's something we monitor very closely as well.

So, overall, feel good about our positioning.

Okay, thanks.

Separately, have you guys talked or been in any sort of partnerships with any single-family rental operators about working with them to whether it's at the tail end of a community's lifecycle, let one of these rental providers come in and buy a group of homes or bartering with maybe doing contracts for a larger chunk of production?

We have not been in any kind of a formal or broad agreement or discussions with anybody about that.

I would imagine in some communities we have sold a home here and there to single-family rental companies of various sizes, whether it's an individual investor or a large public company, but it's not a significant component of our business today, nor do we have any national type relationship or regional relationships.

Jade Rahmani, KBW.

Thanks very much.

I was wondering if you could comment on what you would expect for backlog conversion rate to trend throughout the year, if the Wilson acquisition has any impact on that and if just overall you think it will be similar to 2016?

Jade, we really only have good visibility a quarter out on that, so we provided our Q1 conversion, which would be a slight improvement on our conversion versus last year in Q1 and certainly, our goals are to continue to get more efficient and part of that would be to continue to improve our backlog conversion and so that would certainly be part of our goals for the year, but we will only provide the guidance quarter-by-quarter as we have visibility to the upcoming quarter.

On average selling price, are you expecting it to remain relatively stable near the $300,000 mark, or should we expect a downtick on mix based on the growth in entry level and the Freedom initiative?

Hard one to predict, Jade, but we have seen the ability to continue to move that ASP up in spite of Express being a bigger piece of our business, so as we look forward to 2017, our best educated guess is it will be flat to slightly up.

Thank you.

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

I would like to turn the floor back over to management for any further or closing comments.

Thank you, Kevin.

We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our first-quarter results.

And a special thanks to all of the D.R. Horton team.

Outstanding job closing out 2016 and positioning for continued success in 2017.

You are the best of the best and I thank you for all you do.

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 today.