霍頓房屋 (DHI) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Fourth Quarter 2017 Conference Call for D.R. Horton, America’s Builder, the largest builder in the United States.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jessica Hansen, Vice President, 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 2017 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 this call, we will post updated supplementary data to our Investor Relations site on the Presentations section under News and Events for your reference.

The supplementary information includes data on our homebuilding return on inventory, home sales gross margin, 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 this 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 the year strong.

Pretax income for the fourth quarter increased 12% to $486 million on $4.2 billion of revenue.

And our pretax operating margin improved 10 basis points to 11.7%.

Over the year, we delivered in line -- results in line with or better than original guidance we shared at the start of last year, with consolidated pretax income increasing 18% to $1.6 billion on $14.1 billion of revenue.

We closed 45,751 homes this year, an increase of 5,442 homes over -- or 14% over last year.

Our consolidated pretax margin for the year improved 30 basis points to 11.4%, and our return on inventory improved 120 basis points to 16.6%.

During the fourth quarter, we generated $626 million of cash from operations, bringing our total to $435 million for the year and to $1.8 billion over the past 3 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 annual positive operating cash flows and improved returns, with 26,200 homes in inventory at the end of the last year, positive sales trends in October and 249,000 lots owned and controlled, we are well-positioned for another strong year in 2018.

Mike?

Net income for the fourth quarter increased 10% to $313 million or $0.82 per diluted share compared to $284 million or $0.75 per diluted share in the prior year quarter.

Our consolidated pretax income increased 12% to $486 million in the fourth quarter, compared to $433 million, and homebuilding pretax income increased 13% to $458 million compared to $405 million.

Our backlog conversion rate for the fourth quarter was 87%.

As a result, our fourth quarter home sales revenues increased 11% to $4 billion on 13,165 homes closed, up from $3.6 billion on 12,247 homes closed in the year-ago quarter.

Our average closing price for the quarter was $306,500, up 3% compared to the prior year, due to an increase in our average sales price per square foot and a higher percentage of closings in our West region this quarter as a result of the hurricane impact in other regions.

In the fourth quarter, our Express Homes brand accounted for 37% of our homes sold, 34% of homes closed and 26% of home sales revenue.

And for the year, it accounted for 34% of homes sold, 31% of homes closed and 24% of home sales revenue.

Homes for higher-end, move-up and luxury buyers priced greater than $500,000 under both our D.R. Horton and Emerald Homes brands were 8% of our homes closed and 20% of our home sales revenue in the fourth quarter.

And for the year, they accounted for 7% of homes closed and 17% of home sales revenue.

Our active adult Freedom Homes brand is now being offered in 21 markets across 12 states, and customer response to these homes and communities offering a low-maintenance lifestyle at an affordable price has been positive.

Freedom Homes accounted for 1% of both our homes sold and closed in the fourth quarter.

Bill?

The value of our net sales orders in the fourth quarter increased 19% from the year-ago quarter to $3.1 billion.

And homes sold increased 18% to 10,333 homes.

Our average number of active selling communities increased to 2% from the prior year quarter.

Our average sales price of net sales orders increased 1% to $301,600, and our fourth quarter cancellation rate is 25%.

The value of our backlog increased 8% from a year ago to $3.7 billion, with an average sales price per home of $302,200.

And homes in backlog increased 7% to 12,329 homes.

We are very pleased with our current sales pace, and October sales were in line with our fiscal 2018 business plan, supporting our growth expectations for the year.

Jessica?

Our gross profit margin on home sales revenue in the fourth quarter was 20.3%, down 20 basis points from the prior year quarter and up 50 basis points sequentially from the third quarter.

The sequential improvement in our gross margin was primarily due to lower litigation charges in the current quarter.

In today's housing market, we continue to expect our average home sales gross margin to be around 20%, with quarterly fluctuations that may range from 19% to 21%, due to product and geographic mix as well as the relative impact in warranty, litigation and interest cost.

Bill?

In the fourth quarter, SG&A expense as a percentage of homebuilding revenues was 8.6%, down 20 basis points from the prior year quarter.

This quarter's SG&A includes approximately $3 million of Forestar transaction costs and expenses related to the recent hurricanes.

Homebuilding SG&A for the full year improved 40 basis points to 8.9% compared to 9.3% in 2016, as our increased revenues improved the leverage of our fixed overhead costs.

We remain focused on controlling our SG&A while ensuring our infrastructure adequately supports our growth, and we expect to further leverage our SG&A in 2018.

Jessica?

Financial services pretax income in the fourth quarter was $27.7 million.

For the year, financial services pretax income increased 27% to $113 million on $350 million of revenues, representing a 32% pretax operating margin.

96% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 55% of our home buyers.

SHA VA loans accounted for 46% of the mortgage company's volume.

Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 and an average loan-to-value ratio of 88%.

First-time homebuyers represented 44% of the closings handled by our mortgage company, consistent with the prior year quarter.

Mike?

We ended the year with 26,200 homes in inventory; 13,800 of our total homes were unsold, with 9,700 in various stages of construction and 4,100 completed.

Compared to a year ago, we have 13% more homes in inventory, putting us in a very strong position to start 2018.

Our fourth quarter investments in lots, land and development totaled $771 million, of which, $424 million was to replenish finished lots and land and $347 million was for land development.

For the year, we invested $3.5 billion in lots, land and development.

We are planning to replenish our own land and lot supply in 2018 at a rate to support our expected growth and revenues.

David?

This year, we achieved our previously stated goal of a 50% owned, 50% optioned land and lot pipeline.

We believe we can increase the option portion of our pipeline to 60% over the next few years while maintaining our number of owned lots relatively flat with the current level.

At September 30, our land and lot portfolio consisted of 249,000 lots, of which, 125,000 are owned and 124,000 are controlled through optioned contracts.

91,000 of our total lots are finished, of which 33,000 are owned and 58,000 are optioned.

We have increased our option lot position 35% from a year ago, and we plan to continue expanding our relationships with land developers across our national footprint to further increase the option portion of our land supply.

Our 249,000 total lot portfolio is a strong competitive advantage in the current housing market and a sufficient lot supply to support our targeted growth.

Mike?

On October 5, we acquired 75% of the outstanding shares of Forestar Group, a publicly traded residential real estate company, for approximately $560 million in cash.

D.R. Horton's alignment with Forestar advances our strategy of expanding relationships with land developers across the country and increasing our optioned land and lot pipeline to enhance operational efficiency and returns.

At the acquisition date, Forestar had operations in 14 markets in 10 states, where it owned, directly or through joint ventures, interest in 44 residential and mixed-use projects.

Both companies are currently identifying land development opportunities to expand Forestar's platform.

Since the closing months ago, Forestar has been evaluating approximately 15 D.R. Horton-sourced opportunities located primarily in Texas, Florida, Georgia and the Carolinas, 2 of which Forestar has already closed.

These 15 communities will yield approximately 8,000 finished lots, the majority of which could be sold at D.R. Horton in accordance with the master supply agreement between the 2 companies.

Forestar's aggregate peak inventory investment for this portfolio of projects is expected to be approximately $200 million, and we expect Forestar to commit at least $400 million of capital, primarily to D.R. Horton-sourced projects during 2018.

We are also actively working with Forestar on plans for their existing projects and are in discussions for D.R. Horton to potentially purchase approximately 3,000 lots from Forestar's current portfolio.

The post-merger interactions between the D.R. Horton and Forestar teams have been very productive, and we are pleased with the progress we're making on the integration.

We are confident that Forestar's growth is likely to exceed the original projections outlined in our slide deck from June.

We continue to be excited about the value that this relationship will create over the long term for both D.R. Horton and Forestar shareholders.

As a public company, Forestar will continue to file quarterly and annual reports as well as any other required public information, but they will not host quarterly conference calls.

D.R. Horton will be handling Forestar's Investor Relations to allow the Forestar team to focus solely on integration and operations during the coming months.

Forestar operates on a calendar year-end and will file its 2017 annual report by mid-March of 2018.

We do not expect Forestar to have a material impact on our fiscal 2018 earnings.

We plan to outline the purchase accounting for the transaction and presentation of our consolidated results, including Forestar, at our first quarter earnings release and conference call in January.

And we will provide an update on our integration progress at that time.

We expect to provide initial Forestar guidance for 2018 in January.

We then expect to provide additional 2018 guidance for Forestar on our second quarter call in April, following Forestar's calendar year in reporting.

Bill?

During the fourth quarter, we generated $626 million of cash flow from operations.

For the full year, our cash flow from operations was $435 million, in line with our original guidance.

Our cash flow generation exceeded our updated guidance due to better-than-expected closings in late September and a greater-than-anticipated impact from the hurricanes on land development and construction activity.

At September 30, our homebuilding liquidity consisted of $973 million of unrestricted homebuilding cash and $1.2 billion of available capacity on our revolving credit facility.

Our homebuilding leverage improved 520 basis points from a year ago to 24%.

The balance of our public notes outstanding at September 30 was $2.4 billion, and we have a total of $400 million of senior notes that mature in fiscal 2018, which we will likely refinance in the next few months.

We ended the year with a shareholders' equity balance of $7.7 billion and book value per common share of $20.66, up 13% from a year ago.

Based on our financial metrics and positive outlook for fiscal 2018, our Board of Directors increased our quarterly cash dividend by 25% to $12.05 per share.

We currently expect to pay dividends of approximately $190 million to our shareholders in fiscal 2018.

We repurchased 1.85 million shares of our common stock for $60.6 million during fiscal 2017 and currently have a $200 million share repurchase authorization outstanding effective through July 2018.

David?

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

Our balance sheet strength, liquidity, consistent earnings growth and cash flow generation are increasing our flexibility, and we plan to utilize our strong position to improve the long-term value of the company.

Our top cash flow priorities are to consider market -- are to consolidate market share by investing in our homebuilding business and strategic acquisitions, reduce or maintain debt levels and return capital to our shareholders through dividends and share repurchases.

We expect to generate at least $500 million of cash from operations in 2018, growing to over $1 billion annually in 2020.

As we generate increased cash flows, we expect to pay down debt, decrease our leverage, increase our dividend and repurchase shares to offset dilution, with a target to keep our outstanding share count flat beginning in 2020.

Jessica?

Looking forward, our expectations for fiscal 2018 are consistent with what we shared on our July call and are based on today's market conditions.

They also exclude any impact from Forestar.

In fiscal 2018, we expect to generate a consolidated pretax margin of 11.5% to 11.7%.

We expect to generate consolidated revenues between $15.5 billion and $16.3 billion and to close between 50,500 and 52,500 homes.

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

We estimate our annual homebuilding SG&A expense as a percentage of homebuilding revenues will be around 8.7%, with our SG&A percentage higher in the first half of the year and lower in the second half.

We expect our financial services operating margin for the year to be 30% to 32%, with the first 2 quarters of the year lower and the third and fourth quarters higher.

We forecast an income tax rate for 2018 of approximately 35.2%, and that our diluted share count will increase by less than 1%.

We also expect to generate positive cash flow from operations of at least $500 million in 2018, excluding any impact from the consolidation of Forestar in our financial statements.

Our fiscal 2018 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.

We do not currently expect Forestar to have a material impact on D.R. Horton's earnings in fiscal 2018.

For the first quarter of 2018, we expect our number of homes closed will approximate a beginning backlog conversion rate in the range of 83% to 86%.

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 the range of 9.5% to 9.8%.

David?

In closing, the strength of our team and operating platform across the country allowed us to deliver full year results for 2017 in line with or better than guidance we provided at the start of last year.

While growing our revenue and pretax profits at a double-digit pace again this year, we generated $435 million of positive cash flow from operations and improved our annual homebuilding return on inventory by 120 basis points to 16.6%.

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

We are well positioned to do so with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offering 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 congratulate the entire D.R. Horton team on our 16th consecutive year as the largest builder by volume in the United States, and we thank you for your hard work and accomplishments.

We look forward to working together to continue growing and improving our operations in 2018 as we celebrate our 40th anniversary year.

This concludes our prepared remarks.

We will now host any questions.

(Operator Instructions) Our first question today is coming from John Lovallo from Bank of America.

The first question is, as D.R. Horton becomes more asset-light, cash flow should improve pretty meaningfully, in our view, very meaningfully.

Where do you think free cash flow conversion can kind of trend over the next few years?

And if it is as solid as we think at least, I mean, would you be open to more aggressively repurchasing shares?

John, we're taking this one step at a time, but we've basically stated that we expect to achieve the cash flow from operations greater than $500 million this year, and we do expect that to ramp up over the next couple of years.

We expect that by 2020, our cash flow from operations should be in excess of $1 billion.

That's our estimate today and our guidance today.

But certainly, we have -- we do have high expectations for our ability to increase our option portion of our land position, and certainly, Forestar is a part of that as well.

And over the next year as we build out Forestar's platform and it begins to contribute a greater impact on our overall operations, I do think we do have a lot of cash flow generation capability that could, potentially, exceed what we're guiding to now for the next couple of years.

On share repurchase, we are starting to repurchase more shares than we have historically, and our target right now is to increase those share repurchases to a point that it fully offsets our dilution, so that our share count will remain flat by 2020.

Certainly, to the extent that we're able to generate more cash than we're currently guiding in time that, that could change as well over the longer term.

But right now, in the 3-year window, we're targeting to offset dilution over the next couple of years.

Okay, that's helpful.

And then, touching on the options.

The 60% option percentage that you guys have out there now, you maybe have been talking about that for a bit.

Has the bogey changed at all, given the inclusion of Forestar?

And I mean is there anything that could prevent you from reaching much higher levels, call it, 70%, even 75%?

I think nothing's really changed with regard to the 60% target with Forestar.

That's part of our strategy to achieve that.

Over time, once we achieve that goal, we will continue to set higher goals for ourselves.

But it's one developer, one contract, one project at a time that we make these relationships work.

Our next question today is coming from Alan Ratner from Zelman & Associates.

First question on Forestar, you mentioned a few markets where you've already sourced in options and deals.

I think those are all existing Forestar markets, if I remember correctly.

I'm just curious, as you're ramping up the personnel within Forestar, have you looked into bringing that operation into some of your more higher cost markets like California, Pacific Northwest, where obviously, the land investment is going to be a much greater percentage of the home value; it would certainly tie up a lot of more capital there.

Any thoughts on really the viability of optioning a meaningful percentage of lots out in these higher-cost markets?

Where we -- the -- to your first point, we have -- Forestar has acquired a project in Florida, which is not in a market they've been operating in.

And we're looking to -- as we've talked about kind of bootstrap our way in, leverage the growth of Forestar into new markets, leveraging the Horton platform existing in those markets.

With regard to sort of a higher-land-basis markets, we have identified a couple of projects to take a look at up in the Pacific Northwest, but because they are more capital-intensive, they may be a little slower to grow their ramp there.

Got it.

Okay.

And then second question on M&A, in general, from obviously a big deal here in the space over the last couple of weeks.

I want to make sure I'm thinking about this correctly.

On one hand, you're definitely looking to shift the business towards more asset-light, which clearly, the market is rewarding and seems to like.

On the other hand, I know you guys have always been very focused on scale in both local as well as national and take a lot of pride in being the largest builder in the country, and certainly, there's advantages to go along with that.

So I'm just curious now as you think about the allocation of capital, would it be inconsistent for you to continue to look toward M&A opportunities on the traditional homebuilding side of the business, even if that means temporarily lengthening the land book if it comes with the benefit of increased scale?

Alan, we look at deals every day, and we'll continue to do that.

We're looking for a fit.

We're looking for something that is additive that we can grow, and we look at them from the same stamp when we look at a piece of land.

We're going to -- it's got to be a fit, culturally, for us, for the people.

But from a capital outlay standpoint, we want to return the cash over the asset base within 2 years.

And so that makes it difficult to look at the great big deals.

We've had a lot of success integrating small private companies in over the last 4 or 5 years, like the way -- like what that does for our company, like the fact that you get the return of the cash pretty quick.

We'll look at them, yes.

We're going to look at them, we're going to continue look at them.

But it's a tough hurdle to get over.

Our next question is coming from Stephen East of Wells Fargo.

Just quickly to follow on Alan's M&A question.

I know Forestar's not a big deal for you all, but it's a big change in the way you all operate.

So is your appetite for M&A changed at all temporarily?

No.

I mean, I think what we're trying to do is look at things on a consistent basis with a lot of discipline and does it make us better over the long term.

So kind of what we talked about before is what we're going to continue to do and continue to talk about.

Here comes my compound question here.

Forestar.

Several things.

I sort of call its first 100 days plan, maybe, give a little bit more detail about what you all were talking about there, as you look maybe over the next year or 2 how that evolves.

And did I hear you right that you expect that they would commit $400 million of capital in 2018?

And then if so, just wanting to understand on your land in development, the $3.5 million you did this year, does that change with the Forestar spending $400 million or so in '18?

Sure, Steven, I know we gave a lot of detail on the call.

We've actually got a time line included in the presentation that we'll post that will outline kind of over the next year what we're planning on giving you further on Forestar.

It also includes some of those numbers we talked about.

But you did hear that correctly that we're planning to commit at least $400 million of capital primarily to D.R. Horton-sourced projects starting 2018.

And that doesn't mean we're only going to use $400 million for Forestar this year.

We're looking at other capital sources.

Primarily in the near term, we'll likely put together a revolving credit facility, and we'll also be recycling through some of their assets and bringing that cash back in the door as well.

And Steven, in terms of our land spend at D.R. Horton, we're in year 1 of Forestar, and as they build out their portfolio, we will still be replenishing our lot supply in 2018 at D.R. Horton, and we expect to keep our owned-lot supply relatively flat while we grow our option position with other land developers and as Forestar grows their platform as well.

So our land spend in order to replenish lots and land at D.R. Horton in fiscal 2018 will continue to be at or above the same level that we did this past year.

Certainly, over the long term, there's potential for that to not have to grow at the same pace and not have to replenish as much, but we've got to build out the Forestar platform as well as our third-party developer platforms further.

Consistent with what you've seen in each of these last few years though, we would expect our inventories to grow at a slower rate than our revenues which will drive that continued improvement in returns.

Our next question today is coming from Bob Wetenhall from RBC Capital Markets.

I want to go in the time machine back to 2006 when you delivered 53,000 homes.

And I think that's the peak deliveries for Horton since it's been a public company.

And you're talking about $1 billion of free cash flow by 2020, which is a remarkable number.

So I was just trying to figure out, like in -- if you're -- between '16 and '17, you added about 5,000 homes, and it looks like you're going to add 6,000 homes in 2018, what's the growth profile that you're kind of underwriting to, to get that $1 billion of free cash flow by 2020?

Bob, we plan on double-digit growth next 3 years.

I mean that's how we're setting up the operations of this company.

And we're going to get a little better building each house.

And we feel like the market has got some legs and it's a -- double-digit growth year-over-year over year, you generate a lot of cash.

Just to be tactical about it, you're jacked up about the outlook, it sounds like?

That's a technical term, yes, Bob.

10% to 15% growth over the next 3 years and continue to get more efficient and generate stronger returns, which would mean inventory will grow at a slower pace than revenues.

And it's specifically a revenue target.

This year, you'll see in our fiscal '18 guidance, we're expecting it mainly to come from closings growth.

As we go over the next couple of years, we'll give more specifics, but the target is for double-digit revenue growth.

I will tell you, Bob, the market feels really good.

The positioning of this company with its people and its communities -- never been better.

So yes, we are pretty jacked up.

Sounds good.

Just one other question.

Obviously, you have a very positive view of the marketplace.

I wanted to get your view, if the Fed hikes next year, say 3x or 4x, does that put a damper on your ability to grow by reducing affordability?

Or do you think where Horton's position in the market and renters becoming buyers, that's really not an issue, and instead, the Fed's tightening because the economy is good and they need to do it, there's job growth and that just means you're going to see more buyers?

Thank you, Bob, We're going to adjust to the market if affordability continues to drive.

We're going to meet the market where we need to.

The best thing that can happen for homebuilding is a strong economy and job creation.

So given those 2 things, we'll figure out a way to sell houses, I can guarantee it.

Our next question today is coming from Carl Reichardt from BTIG.

I wanted to talk a little bit about store count for next year.

You are, I think, relatively flat on community count this year, but absorptions were up particularly well back half.

As you look out to next year, do you expect to increase that store count a little bit more and that be more of a driver of order growth to support delivery volume?

Or will it continue to be absorption?

Sure, Carl.

One of the hardest things for us to predict.

And as I remind everyone, I think, every quarter, is why we don't give specific guidance regarding community count.

But our community count was at 2% year-over-year to finish the year out.

It was actually down 1% sequentially.

So as we look and move through fiscal '18, we really expect it to be flat, no more than slightly up.

So a continued story of absorptions maybe with a little bit of community count growth to drive that 10% to 15% increase in units this year.

Okay, Jessica.

And then, Bill, just a clarification question on cash flow for fourth quarter, better than you expected, and you said part of that was due to a lack of the ability to develop, so not spend, due to hurricanes and then also some additional closings.

Can you sort of parse out for me the dollars associated with each of those 2 elements in terms of what came in better versus what didn't happen and would go into Q1 or later quarters?

I don't have the specific dollars in front of me, Carl, here but the delta on the closing side, we provided revised guidance in mid-September of about 85% backlog conversion.

Our operators were able to over deliver on that in late September, and we delivered 87%, so that 2% change in conversion rate would be the delta on the closing side.

The remainder would be less spending on inventory, primarily in the land development side, a little bit of land back as well.

As in the -- primarily in the areas that were affected by the hurricane, there was -- where there was certainly a slowdown and some disruption in activity there.

And that was a little bit greater than we anticipated.

And so the remainder of that cash flow delta would come from our land activity.

We would have expected our annual land spend and development spend to be a bit higher than it was.

And so clearly, that's a timing thing that does slide into 2018.

But even with that, we still expect to exceed $500 million of cash flow from operations in 2018.

Our next question today is coming from Mike Rehaut from JPMorgan.

A couple of questions around that is obviously, that's kind of been the primary focus of investors and how that kind of reshapes your company over the next few years, or perhaps, continues on your current path of more optioning and better returns.

When you talk about the operating cash flow outlook for '18 of $500 million, which I think is up from your prior guidance of $300 million to $500 million, it seems like part of that is due to the Forestar shift, if I'm thinking about it right, with the $400 million of capital expected to be of Forestar to use for D.R. Horton-sourced deals.

So just trying to get a sense of maybe what the operating cash flow would look like, if you netted out the Forestar investment, is it as simple as $500 million minus $400 million?

I know you talked about some recycling of cash as well from Forestar.

I guess that's my first question.

Mike, I think, looking at the $400 million we expect Forestar to commit in '18, not all of that will be spent in '18.

That's the commitment to those projects.

As they develop and execute over time, that -- some of that will be spent in '18, some of it in '19.

So it's not all $400 million is going to go out on the -- when you start the project.

The other part of it is that Forestar does have a current portfolio of projects, a lot of lots under contracts to builders to sell over the next 12 months that they'll be continuing to deliver lots to those builders, which will bring up more capital to continue developing some of their existing projects as well as invest in net new projects for the Forestar program.

So we're still working out the exact capital needs Forestar's going to have and expect to get more of that information back to you in '18.

Okay.

I appreciate that, obviously looking forward to that.

I guess, secondly, you also mentioned that even after the first month or so, that looks like you could exceed some of the projections for Forestar that you originally filed, you had in your June presentation.

And looking at that presentation, just for example, if you take like a 2020 snapshot of those slides, where you said for Forestar could have lot deliveries of a little over 7,000 versus maybe around 1,000 in 2018, just trying to get a sense for what that upside might be.

You've already noted that -- you've provided 15 sourced deals to Forestar, of which, 2 have already closed.

And in the assumptions set on -- from the presentation, I think on Slide 10, you said that the assumption there would be 8 projects for Forestar in the first year.

So I assume, obviously, we're not talking about a doubling of the projections but just trying to get a sense perhaps of what the upside might be?

We're still working with the Forestar guys to figure out exactly what those projections ought to look like.

We are optimistic about the numbers we put out in that June deck that we're seeing a greater deal flow that will give us an ability to exceed these numbers.

It's hard to sit here today and quantify that exactly, but we are seeing a deal flow that we expect will be greater than what we anticipated for these projections.

Doubling, probably a little too aggressive to say that it's going to double at this point, but we're working hard to find every opportunity that makes sense and hits the return hurdles for Forestar.

Our next session today is coming from Ken Zener from KeyBanc Capital Market.

So one of the things that we always talk about is the pace that you talked about your community count.

What I'd like to focus on is your units under construction in your 4Q, so your September, and how you've made the choice to not cycle down as much, often as other builders do seasonally, which really gives you just a higher entry point into 2Q.

Is there any particular reason -- and I think that's what's really different about your business model versus other builders is you do build all this [spec].

Looking at this year, you're up 13% I believe year-over-year versus last year at 17%, community count seem to be flat in both cases.

Is there something happening that this year versus last year in terms of construction or your regional mix that's kind of keeping that 26,000 unchanged number at a lower growth rate than you had last year?

No, Ken, I wouldn't say there's anything different than what we've done.

We're just positioning to grow the company.

And I do think that you get to a certain size of the -- the positioning has to -- takes a bit longer, so we purposefully put more inventory out, started more inventory late in the fourth quarter to be positioned for a, what we think is going to be a very good spring selling market.

And Ken, two years ago, I think we entered fiscal '16 probably a little lighter than we would've liked to have been in housing inventory, for the market that we saw in front of us.

And so as we grew our year-over-year, year-end inventory position in '15 to '16 pretty aggressively, and we're glad we did because we were able to take advantage of that into '16.

The growth from '16 to '17 has moderated a little bit from that prior year growth because we were better positioned to start '16 -- we were better positioned, excuse me, to start '17 than we were '16.

So that gave us less need to add inventory, but we still feel what units we have on hand right now, 26,300, we feel great about that positioning going into '18.

And just for reference, that's our overall housing inventory that's up to 13%.

Our spec count is actually at 17% going into the year, which we feel very good about.

Okay.

And if I can use that segue to hinge on spring selling, which we approach just seasonally, where over the last few years, your pace, you have to look back over the long term, and it appears usually, the pace usually sell at 15% to 18% in the December quarter.

But in the last few years, it's been either up or down single-digit, which is a big change and that provides a lot greater pace momentum.

Can you talk about what your base outlook is for spring selling; I realize you don't know the exact numbers, but just from the seasonal basis, what do you expect that to be historically?

It goes in line with what we're trying to drive from a closings perspective, which is the only number we actually guide to.

But if you look at it, generally speaking, we typically see a very sharp increase from December to March, although September to December's relatively flat, slightly up to slightly down.

Typically December to March, we would expect to see, at least, call it, 50% increase in our sales to kind of feel good about where the spring's headed.

A lot of it has to do with how you're positioned, too, where the houses are, what communities, what submarkets.

So I can tell you right now, we feel very good about our position in this year.

And I think it's the best we've done positioning for a fiscal year out of the last 3.

Houses and finished lots.

Yes.

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

I was curious about the kind of optioned land market at this point.

Not all options I guess are structured the same.

So I guess I'm curious in terms of what are the typical terms you're able to negotiate in today's market, whether it's percentage cash down, takedown commitments, the length of time you are able to get these locked up.

Just wondering to kind of how far out on the time horizon you're able to control land in this current environment?

Buck, that's a deal-by-deal situation.

On average, we've got about 5% deposit up for remaining purchase price.

Some of the projects we control 18 months, 24 months supply, others, we control 3 to 5 years' worth of supply in a given project, and it varies.

There are certainly some we put up more than 5%, others less than 5% to arrive at that average.

We work very hard at developing those relationships with the developer community.

Key business partners for us in all of our markets, our division presidents, our land acquisition professionals work very hard to understand their developers and their market and who they need to partner with to get lots put on the ground and then be a good partner to those developers.

Okay.

And just in terms of hard cost, increases or inflation rates, just kind of what are the trends you're seeing in terms of materials, lumber, concrete and the like, in terms of cost increases going into 2018?

And also, the labor situation?

Any comments you have on skilled-labor availability and wage rates you're seeing into the markets right now?

In terms of our cost, Buck, per square foot that we typically talk about, our revenues, once again, outpace our stick-and-brick costs on a year-over-year basis.

We did see a slightly higher increase in both our revenues per square foot and our stick-and-brick per square foot in the first 3 quarters of the year.

But that really was just driven by the closings mix shift that Mike mentioned in our scripted comments, because we had a higher percentage of our closings coming from the West.

So I'd say, really, we're just seeing more of the same.

If you take out the closings mix, we're seeing a very minor increase in our revenues, just enough to cover our stick-and-brick increase.

And then the reason you're not seeing that flow through to an increased gross margin is we continue to have a little bit higher land cost flowing through as well.

Your next question today is coming from Stephen Kim from Evercore ISI.

My first question relates to economies of scale.

Certainly, it is apparent from your results over the last few years, if not longer, that there is a substantive difference in terms of how you're able to translate a given level of demand on the ground up to shareholder value.

And it seems that there are economies of scale that maybe weren't really fully realized or realizable 10 years ago or 15 years ago.

And I was curious if you could just talk about what kinds of things have changed at the corporate level in the way you're managing your business to extract and to drive these economies of scale, and if all of them are the local level or if you've been able to achieve meaningful ones at the national level?

Steve, during the downturn, we all had to get a lot better and look at everything we were doing and try to figure out how we could do it with a little less people a little more efficiently, and a little better or a lot better.

And we -- the key operators in this company went through that downturn, very painful experience, don't want to go through it again.

So we strive every day to get a little better in everything we do.

And I think that has helped and has created a different operating mindset today than we had in 2006.

And then, Steven, I have to add to that, just kind of overall, part of the ability to approach the business differently does come to our balance sheet structure.

And we are operating in a significantly lower leverage level than we did the last time that we were at this scale.

And so -- and I think that's important.

It does reduce our cost structure, it reduces the risk profile significantly.

And then our approach to land, we're being more efficient there, moving more towards option and having a lower-risk land strategy but also more efficient higher return strategy that allows us to still generate cash flow while growing is a significantly different position than we were at the last time that we were at this scale.

So we like our position but we still see, obviously, plenty of opportunities to continue to improve on it from where we are.

Got it.

Okay.

Second question is on the M&A landscape.

I think you said 2 things that I found particularly interesting.

I think, David, you said that you looked for -- you look at acquisitions pretty much the same as you look at a piece of land.

And I think you also mentioned that you preferred smaller tuck-in deals.

And so I just wanted to ask a couple of questions regarding those 2 points.

So one is regarding -- looking at acquisitions of a piece of land.

Generally speaking, we thought that companies such as yourself typically don't like to pay a lot above book value for the acquisitions you look at.

And similar to the way you look at a piece of land, I mean, that's where most of the opportunities, it would seem, arise from is a landholding.

So could you talk about what characteristics in an acquisition would encourage you to pay substantially above book value?

And then regarding the smaller tuck-in deals, why smaller ones?

Is there something about the difficulty to integrate a large deal that concerns you?

Because I would think the competition for the smaller deals would be greater than for the larger deals, particularly, with the Asian companies recently on the hunt, it would seem valuations for the smaller deals are kind of getting pushed up.

And so can you just sort of describe your preference for these smaller deals and what the pipeline looks like compared to last year or the year before?

I would say that -- to start with the end, I'd say the pipeline is probably a little longer today than it was a year ago.

And what we're looking for is not necessarily small or bigger, but -- or bigger, but something that is additive to our company, that we can take and grow or integrate some of the things they're doing or the people that they have that make us better.

That's -- first thing we look at in any acquisition is the culture of the company.

And if the culture is not aligned, the people aren't going to be aligned, it's typically not a great deal for us.

And the next thing we look about is what kind of premium we got to pay and can we earn that premium back in 2 years?

And if we can't, the deal structure is probably not right for us.

We'll let Mike...

With the current platform we have, we're not being -- we're not motivated to pay a big premium for anything that we couldn't otherwise do ourselves.

As David said before, if it's not something that's going to make our company better, it's probably something that we'd better up spend our time and effort focused in a different area.

I mean, I guess the only thing that would motivate us to want to pay a significant premium over book value would be to end my career at Horton.

That, that would pretty much do it, I think.

We don't see any lack of opportunities to grow our business organically at the pace we want to grow at today.

So it puts us in a very strong position that there's no deal we have to go do to hit our growth targets.

All right.

That's helpful.

Just to translate, when you said the pipeline is a longer than it used to be, does that mean that it is more chock-full of acquisitions that are of interest or the opposite?

No, there are plenty of acquisition opportunities that we're evaluating to determine interest on.

I mean -- and it's the way it's kind of continued to be for the last several years and it's been -- people -- the longer the cycle has performed well, the industry has performed well, more and more people have a confidence that they feel like they can price their company comfortable.

And a lot of the private builder situations, the principles, the individuals running it day-to-day-to-day are 3 to 5 years older today than they were 3 to 5 years ago.

So their perspective and outlook potentially may be changing.

Our next question today is coming from Jack Micenko from SIG.

First question, you're looking at your Southeast operations, looks like you did a bit better, certainly than some of the peers who pointed out a lot of disruption with some of the storms.

Curious what you attribute that relative outperformance to?

Great people.

Yes, obviously.

That is the platform.

It is people.

We've got a great position there.

There was an impact.

There's no doubt there was an impact.

There was a disruption from hurricanes.

But we've got a lot of hard-working people that worked their way through it.

Okay.

And then, stepping back a bit, you're going to generate a ton of cash.

Your land strategy is moving to be more capital-efficient.

Kind of call it out that we're not going to see outsized buybacks, at least, in the next couple of years.

I'm just curious, how do we think about -- or how do you think about return on equity -- improving return on equity?

You talk about de-leveraging.

What am I missing in this cash build and equity build?

I mean, I think book value was up 13% to 14% year-over-year.

Is there more to squeeze out of operations?

Where does the ROE improvement come from with so much cash build?

There's always room to improve on operations, we'll continue to improve on that.

And we are focused on return on equity as well.

In order to better -- our primary driver right now at return on equity is to continue to drive a stronger ROI.

And we do expect to continue to grow revenues faster than our inventory growth to drive that.

And then we're at the beginning stages of beginning to repurchase shares that will also provide an element of an improvement to return on equity over time.

But we're going to walk before we run.

We're going to begin by taking the steps towards offsetting our dilution.

And when we've achieved that, then we'll see where we are, and we'll take the next steps from there.

Clearly, we believe that longer term, we have significant cash flow generation opportunities that will give us a lot of flexibility down the line.

But for the window that we see in the next 2 to 3 years, we believe we're comfortable today stating the loss at dilution, and then we'll take the next steps when we get there.

And you'll see in the investor presentation that we're going to post at the end of this call, we actually have added a return on equity slide after our return on inventory, showing that our ROE, while reducing leverage pretty dramatically, has improved from 11.8% in fiscal 2014 to 14.4% in fiscal '17.

So it's improving along with our ROI while we're de-levering.

And we do expect it to continue to improve.

Just one more.

Bill, do you have a leverage target?

I mean, you got the 2.4, you're going to refinance the $400 million in '18 you suggested.

Is there a leverage ratio that we should think about going out to 2020?

We have no specific leverage ratio.

We expect our leverage ratio to continue to drop from now through 2020.

We expect to keep our debt level relatively flat this year by refinancing, but our leverage ratio will drop this year, and then we'd expect that ratio to continue to drop through 2020, while also then increasing our dividends and increasing our share repurchase and growing our business.

A balanced approach is really -- that's the approach we're taking.

It's a balanced approach.

Our final question today is coming from Dan Oppenheim from UBS.

I was wondering if you can talk a bit more in terms of the team's success you've had with Express Homes and the Southwest.

You're getting back to prior peak volumes, but the Southwest is basically 22% of that prior peak at this point, where we're seeing obviously loan limits being a real challenge in some of those markets.

As you think about the gradual easing of credits in FHA and VA loans coming down slightly, relative to where it has been, do you see more potential there in terms of just a greater share of closings coming from there?

How are you thinking about that in terms of future investment?

We think the Phoenix Southwest, which has really driven the Southwest region, is going to continue to outperform.

We're incredibly well positioned there, made some very strategic acquisitions on the land lot side a couple of years ago.

The operating team out there is -- was kind of reset in conjunction with those, and right now we've got an all-star team running that division with incredibly well-positioned lots.

So our expectation is you're going to see continued growth in the Southwest.

And they will get back to their peak at some point.

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

I'd like to turn the floor back to management for any further closing comment.

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 thank you to the D.R. Horton team in a tough fourth quarter because of weather.

You did an outstanding job of delivering the 2017 and even a better job of positioning for 2018.

You're the best in the industry, and we thank you.

Thank you.

That does conclude today's teleconference.

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

We thank you for your participation today.