A key word defining the second quarter financial results of D.R. Horton was stabilization, which the firm experienced in pricing, incentive levels, costs, and gross margins during the fiscal quarter, ended March 31.
“We’ve started seeing pricing and incentive levels stabilize during the quarter. Naturally as that stabilization remains in place a bit longer, you are able to tighten things up a bit,” Bill Wheat, executive vice president and chief financial officer, said during the home builder’s second quarter earnings call. “On a net basis, we expect net margins to stabilize around current levels.”
Stabilization in financial results was driven by an “encouraging start” to the spring selling season in which demand improved throughout the quarter, according to president and CEO David Auld.
Net sales orders in the second quarter increased 73% sequentially to 23,142 homes, while home building revenue ($7.5 billion) and homes closed in the quarter (19,664) were in line with values from the fiscal second quarter of 2022.
D.R. Horton’s cancellation rate in the fiscal quarter was 18%, up slightly from the 16% rate in the same period in 2022, but an improvement from the 27% rate in the first quarter of 2023. The average sales price of net orders marginally increased 1% sequentially to $372,900 in the quarter.
“To adjust to changing market conditions and interest rates, we have continued offering incentives and reducing the prices and sizes of our homes when necessary to provide better affordability to home buyers and to optimize returns on our inventory investments,” executive vice president and co-chief operating officer Paul Romanowski said. “We expect to continue offering a similar level of incentives throughout 2023, and we are seeing indications that our average sales price and incentive levels are beginning to stabilize.”
D.R. Horton’s gross profit margin for home sales revenue in the second quarter was 21.6%, down 230 basis points from the fiscal first quarter. Wheat said the decrease in margin reflects the impact of higher sales incentives and home price reductions, but he noted the builder is beginning to see cost stabilization that could impact future margins.
“We are working with our trade partners and suppliers to reduce our costs on new-home starts. We are making some limited progress in these efforts, but are still experiencing some cost increases due to the overall inflationary environment,” Wheat said. “However, with the lower lumber costs, the average cost of our homes closed is beginning to stabilize. We see indications that our home sales gross margin is also starting to stabilize around current levels.”
D.R. Horton started 19,900 homes in the second quarter and ended the quarter with 43,600 homes in inventory, up 1% sequentially from the first quarter but 27% lower than the second quarter of 2022. Romanowski said the builder decreased its cycle time 12 days from the first quarter. The builder anticipates starts to increase in the third quarter due to strong demand conditions to start the spring selling season.
Land Position
D.R. Horton’s home building lot position consists of 547,000 lots, 25% of which are owned and 75% controlled through purchase contracts. Executive vice president and co-chief operating officer Michael Murray said 32% of the builder’s total owned lots are finished, and 53% of its controlled lots are, or will be, finished when purchased.
“Our capital-efficient and flexible lot portfolio is a key to our strong competitive position,” Murray said. “We are actively managing our investments in lots, land, and development based on current market conditions.”
The builder’s investment in lots, land, and development totaled $1.7 billion in the second quarter, down 19% from the prior-year quarter but flat sequentially. D.R. Horton allocated $590 million to land development and $150 million to land acquisition in the quarter.
Rental Operations
The builder’s rental operations generated $224 million of revenue during the second quarter from the sale of 721 single-family rental homes. The number of single-family rental homes sold represents an increase of 96% compared with the 368 homes sold during the second quarter of 2022. At the end of the second quarter, D.R. Horton had $2.1 billion of single-family rental property inventory, consisting of 8,630 homes, of which 5,980 were completed, and 4,930 lots, of which 930 were finished.
During the second quarter, the company made no sales of multifamily rental units, in line with expectations shared during the company’s first quarter earnings call.
“We expect our rental operations to generate significant increases in both revenues and profits in fiscal 2023 as our platform matures and expands across more markets,” Murray said.
