DR Horton : Q4 FY 2025 Earnings Call Transcript

About this update from D.r. Horton, Inc.

Transcript of D.R. Horton, Inc. Q4 2025 Earnings Call/Webcast October 28, 2025 Participants Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Analysts John Lovallo - UBS Group AG Stephen Kim - Evercore ISI Sam Reid - Wells Fargo Securities, LLC Alan Ratner - Zelman & Associates Matthew Bouley - Barclays Rafe Jadrosich - Bank of America Trevor Allinson - Wolfe Research, LLC Anthony Pettinari - Citigroup Inc. Michael Rehaut - JPMorgan Chase & Co. Kenneth Zener - Seaport Research Partners Charles Perron-Piché - Goldman Sachs Michael Dahl - RBC Capital Markets Jade Rahmani - Keefe, Bruyette & Woods, Inc. Jay McCanless - Wedbush Securities Alex Rygiel - Texas Capital Securities Presentation Operator Good morning, and welcome to the Fourth Quarter 2025 Earnings Conference Call for D.R. Horton, America's Builder. At this time, all participants are on a listen-only mode. [Operator Instructions] And we will open the floor for your questions and comments after the presentation. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Thank you, Paul, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2025 financial results. Transcript Provided by Before we get started, today's call includes 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 factors that can lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release and supplemental data presentation can be found on our website at investor.drhorton.com, and we plan to file our 10-K in about 3 weeks. Please note that we are now posting our supplementary data presentation at the time of our earnings release. After this call, we will also post our updated investor presentation for your reference. Now, I will turn the call over to Paul Romanowski, our President and CEO. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Chief Operating Officer; and Bill Wheat, our Chief Financial Officer. This year the D.R. Horton team had the privilege of providing homeownership to nearly 85,000 individuals and families, including approximately 43,000 first-time homebuyers. In total, our homebuilding and rental operations provided more than 91,200 households a place to call home during fiscal 2025. We worked every day to use our industry-leading platform, unmatched scale, efficient operations, and experienced employees to bring affordable homeownership opportunities to more Americans. New home demand remains impacted by affordability constraints and cautious consumer sentiment. Our teams continued to respond with discipline during the fourth quarter, driving a 5% increase in net sales orders, while carefully balancing pace, price, and incentives to meet demand. The D.R. Horton team produced solid fourth quarter results to finish the year, highlighted by consolidated pre-tax income of $1.2 billion on revenues of $9.7 billion, with a pre-tax profit margin of 12.4%. For the year, our consolidated pre-tax income was $4.7 billion, with a pre-tax profit margin of 13.8%. Our homebuilding pre-tax return on inventory for the year was 20.1%, return on equity was 14.6%, and return on assets was 10%. Over the last 10 years, D.R. Horton has delivered a compounded annual shareholder return of more than 20%, compared to the S&P 500's compounded annual return of 13.3%. Also, our return on assets ranks in the top 20% of all S&P 500 companies for the past 3, 5, and 10-year Transcript Provided by periods, demonstrating that our disciplined, returns-focused operating model produces sustainable results and positions us well for continued value creation. We remain focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. In fiscal 2025, we generated $3.4 billion of cash from operations after making homebuilding investments in lots, land, and development totaling $8.5 billion. We leveraged our strong cash flow and financial position to return $4.8 billion to shareholders through repurchases and dividends. Over the past 5 years, we've generated $11 billion of operating cash flow and returned all of it to shareholders. Over the same timeframe, we grew consolidated revenues at an 11% compound annual rate, reflecting consistent, efficient execution and disciplined, balanced capital allocation. We strive to offer our customers an attractive value proposition by providing quality homes at affordable price points. We will continue to tailor our product offerings, sales incentives, and number of homes in inventory based on demand in each of our markets to maximize returns. Mike? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. Net income for the quarter was $905.3 million or $3.04 per diluted share on consolidated revenues of $9.7 billion. For the year, net income was $3.6 billion or $11.57 per diluted share on revenues of $34.3 billion. Our fourth quarter home sales revenues were $8.5 billion on 23,368 homes closed. Our average closing sales price for the quarter of $365,600 is down 1% sequentially, down 3% year-over-year, and is down 9% from our peak sales price of more than $400,000 in 2022. Our average sales price is lower than the average sales price of new homes in the United States by $140,000, or almost 30%. Additionally, the median sales price of our homes is $65,000 lower than the median price of an existing home. Bill? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Our net sales orders in the fourth quarter increased 5% from the prior year quarter to 20,078 homes, and order value increased 3% to $7.3 billion. Our cancellation rate for the quarter was 20%, up from 17% sequentially and down from 21% in the prior year quarter. Our cancellation rate is in line with our historical average. Our average number of active selling communities was up 1% sequentially and up 13% from the prior year. The average price of net sales orders in the fourth quarter was $364,900, which was flat sequentially and down 3% from the prior year quarter. Jessica? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Our gross profit margin on home sales revenues in the fourth quarter was 20%, down 180 basis points sequentially from the June quarter. 110 basis points of the decrease in our gross margin from June to September was due to higher incentive costs on homes closed during the quarter, and 60 basis points of the decrease was from higher than normal litigation costs. Transcript Provided by On a per square foot basis, home sales revenues were down roughly 1% sequentially, while stick and brick costs per square foot were flat and lot costs increased 3%. For the first quarter, we expect our home sales gross margin to be flat to slightly up from the fourth quarter. We anticipate our incentive levels to remain elevated in fiscal 2026 with both incentive levels and home sales gross margin for the full year, dependent on the strength of demand during the spring selling season, changes in mortgage interest rates, and other market conditions. Bill? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Our fourth quarter homebuilding SG&A expenses were flat with the prior year quarter, and homebuilding SG&A expense as a percentage of revenues was 7.9%. For the year, homebuilding SG&A was 8.3% of revenues. Our annual SG&A expenses increased 3%, primarily due to the expansion of our platform, including a 13% increase in our average community count. The investments we have made in our team and platform position us to continue producing strong returns, cash flow, and market share gains. And we remain focused on managing our SG&A costs efficiently across our operations. Paul? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. We started 14,600 homes in the September quarter and ended the year with 29,600 homes in inventory, down 21% from a year-ago. 19,600 of our total homes at September 30th were unsold. 9,300 of our unsold homes at year-end were completed, including 800 that had been completed for greater than 6 months. For homes we closed in the fourth quarter, our median cycle time, measured from home start to home close, decreased by a week from the third quarter and 2 weeks from a year-ago. Our improved cycle times enable us to hold fewer homes in inventory and turn our housing inventory more efficiently. We expect our sales pace will increase in the first half of our fiscal year in preparation for the spring selling season. And we will continue to manage our homes in inventory and starts pace based on market conditions. Mike? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. Our homebuilding lot position at year-end consisted of approximately 592,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 78,000 or roughly half of our own lots are finished, and the majority of our optioned lots will be finished when we purchase them over the next several years. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationship with land developers across the country to allow us to build more homes on lots developed by others. Of the homes we closed during the quarter, 65% were on a lot developed by either Forestar or a third-party, up from 64% in the prior year quarter. Transcript Provided by Our fourth quarter homebuilding investments in lots, land and development totaled $2 billion, of which $1.3 billion was for finished lots, $540 million was for land development and $120 million was for land acquisition. For the year, our homebuilding investments in lots, land and development totaled $8.5 billion. Paul? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. In the fourth quarter, our rental operations generated $81 million of pre-tax income on $805 million of revenues from the sale of 1,565 single-family rental homes and 1,815 multi-family rental units. For the full year, our rental operations generated $170 million of pre-tax income on $1.6 billion of revenues from the sale of 3,460 single-family rental homes and 2,947 multi-family rental units. Our rental property inventory at September 30th was $2.7 billion, down 7% from a year-ago, and consisted of $378 million of single-family rental properties and $2.3 billion of multifamily rental properties. We remain focused on improving the capital efficiency and returns of our rental operations. Jessica? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Forestar is our majority-owned residential lot development company and our strategic relationship is a vital component of our returns focused business model. Forestar reported revenues for the fourth quarter of $671 million on 4,891 lots sold with pre-tax income of $113 million. For the full year, Forestar delivered 14,240 lots, generating $1.7 billion of revenues and $219 million of pre-tax income. 62% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton and $470 million of our finished lots purchased in the fourth quarter were from Forestar. Forestar's strong, separately capitalized balance sheet, substantial operating platform and lot supply position them well to provide essential finished lots to the homebuilding industry and aggregate significant market share over the next several years. Mike? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. Financial services earned $76 million of pre-tax income in the fourth quarter on $218 million of revenues, with a pre-tax profit margin of 34.7%. For the year, financial services earned $279 million of pre-tax income on $841 million of revenues, with a pre-tax profit margin of 33.1%. As we now post the supplemental data presentation to our Investor website prior to the call, we will no longer review detailed mortgage metrics during our prepared remarks. Bill? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Our capital allocation strategy is disciplined and balanced to support an expanded operating platform that produces attractive returns and substantial operating cash Transcript Provided by flows. We have a strong balance sheet with low leverage and healthy liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During fiscal 2025, we generated $3.4 billion of operating cash flow, representing 10% of our total revenues and 95% of our net income. During the fourth quarter, we repurchased 4.6 million shares of common stock for $689 million. For the full year, we repurchased 30.7 million shares for $4.3 billion, which reduced our outstanding share count by 9% from the prior year end. We also paid cash dividends of $118 million during the quarter and $495 million during fiscal 2025. Our fiscal year-end stockholder's equity was $24.2 billion, down 4% from a year-ago. However, our book value per share was up 5% from a year-ago to $82.15. At September 30th, we had $6.6 billion of consolidated liquidity, consisting of $3 billion of cash and $3.6 billion of available capacity on our credit facilities. We repaid $500 million of our 2.6% senior notes in September and debt at the end of the quarter totaled $6 billion. We have no senior note maturities in fiscal 2026. Our consolidated leverage at fiscal year-end was 19.8% and we plan to maintain our leverage around 20% over the long-term. Based on our strong financial position and cash flow, our Board declared a new quarterly dividend of $0.45 per share, a 13% annualized increase compared to the prior year, making fiscal 2026 our 12th consecutive year of dividend growth. Jessica? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Looking forward to fiscal 2026, we expect new home demand to reflect ongoing affordability constraints and cautious consumer sentiment. As outlined in our press release this morning, for the full year of fiscal 2026, we currently expect to generate consolidated revenues of approximately $33.5 billion to $35 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 88,000 homes. We forecast an income tax rate for fiscal 2026 of approximately 24.5%. We expect to generate at least $3 billion of cash flow from operations in fiscal 2026. We currently plan to purchase approximately $2.5 billion of our common stock during fiscal 2026, in addition to paying dividends of around $500 million. For our first fiscal quarter ending December 31st, we currently expect to generate consolidated revenues in the range of $6.3 billion to $6.8 billion and homes closed by our homebuilding operations to be in the range of 17,100 to 17,600 homes. We expect our home sales gross margin for the first quarter to be in the range of 20% to 20.5% and our consolidated pre-tax profit margin to be in the range of 11.3% to 11.8%. Finally, we expect our income tax rate for the quarter to be approximately 24.5%. Paul? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic footprint and focus on delivering quality homes at affordable price points. All of these are key components of our operating platform Transcript Provided by that support our ability to aggregate market share, generate substantial operating cash flows and return capital to investors. We recognize the current volatility and uncertainty in the economy, and we will continue to adjust to market conditions in a disciplined manner to enhance the long-term value of our company. Looking ahead, we have a positive outlook for the housing market over the medium- to long-term. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. Let's continue working to improve our operations and provide homeownership opportunities to more individuals and families during 2026. This concludes our prepared remarks. We will now host questions. Operator Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question today is coming from John Lovallo from UBS. John, your line is live. Q: Good morning, guys. Thanks for taking my questions. The first one is when we think about the walk from the 20% gross margin in the fourth quarter to the 20% to 20.5% in the first quarter, I mean, how do we sort of think about incentives, land, labor, material costs? And, is the warranty litigation costs expected to remain a 60 basis point headwind, or how should we sort of think about that piece? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Thanks, John. The 60 basis points unusual impact from litigation this quarter is not expected to persist into Q1. Our baseline would be that we have a more normal impact from warranty and litigation going forward. And so, if you take our 20.0% reported margin this quarter, pro forma for the litigation would be 20.6% this quarter, and so our guide of 20% to 20.5% would be down slightly from Q4 to Q1 gross margin. And that just reflects the environment we're in and the level of incentives that we're seeing, and our exit gross margin at the end of the quarter was a bit lower than we anticipated coming into the quarter, and so that's what was reflected in the Q1 guide. Q: Makes sense. I mean, it's also the slowest quarter of the calendar year, so that would make sense. But, okay, if we think about the starts pace in the quarter, it seems like it was down fairly meaningfully, I mean, rough math, maybe 30% per community. I guess, how quickly can you ramp this to meet demand if it exceeds your expectations, even to get to that sort of 87,000 deliveries at the midpoint? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. John, our starts were lower certainly in the quarter, and that was intentional as we look to get our inventory in line with where it is also in response to our continued Transcript Provided by improvement in our cycle times. I feel like we don't need to carry as much inventory and also an opportunity for us in a slower starts environment to go into the market with our vendors and try and find reduced stick and brick as we move into the spring season. And, we're going to need to increase our starts as we go through the quarter and into the spring. But feel very good about our ability from a labor base and from our positioning of our communities and our lot supply to respond to the market as it comes at us. Q: Yeah, makes a lot of sense. Okay. Thank you, guys. Operator Thank you. The next question will be from Stephen Kim from Evercore ISI. Stephen, your line is live. Q: Yeah. Thanks a lot, guys. Appreciate all the color as always. I guess, looking at your guide on 1Q, the gross margin, I think, you've explained it pretty well here. But the consolidated pre-tax still seemed a little lighter for us. So, I was curious as to whether or not your outlook in 1Q is anticipating maybe just some seasonal lightness or something in profitability from either rental or Forestar, financial services. Or is there something else maybe below the homebuilding gross margin line that you might want to call out? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Yeah, we would expect rental to be a little bit softer quarter. We delivered a lot this year. And so, rental is lining up to be back end or back half of the year, heavier again for us this year, and so that certainly would have an impact on our consolidated op margin. And then to your point, we'll just have less leverage on SG&A from the lower closings volume on the homebuilding side. Q: Got you. That's very helpful. I appreciate that. The second question relates to your free cash flow guide, which was healthy. You had talked about, I think, in the past being able to achieve free cash conversion, I think, about 80% to 100%. I just want to make sure that I remember that correctly, is that kind of in line with what you are looking for still on a go forward basis? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Yes. We expect to be more consistent in our cash flow conversion going forward. This year cash flow as a percentage of revenues was between 10% and 11% overall, and we expect to be in that range. The guide is roughly in that range as well. Q: Okay. Excellent. Thank you so much. Operator Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live. Transcript Provided by Q: Thanks so much. Quick follow-ups on the gross margin. Just want to drill down a little bit deeper on that sequential step up in warranty expense, just to make sure I fully understand kind of some of the puts and takes there, why you expect it to normalize into the first quarter? And then I'm sorry if I missed, but could you also just remind us what's embedded in Q1 on lot costs and stick and brick? Thanks. Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Sure. On the litigation, we had several large settlements that settled this quarter, nothing outside of the ordinary course of business, but they were larger than normal, just in terms of size. And that has an impact on some of the factors that we use in our litigation reserve model. So we had to increase a few of those. And so that drove the change in the quarter. Those are elements we don't expect to repeat going into the next quarter. And then as we look at margin going forward, our base expectation is we do expect our lot costs and our home closings to continue to increase incrementally, and we're certainly going to be striving to offset that as best we can with stick and brick savings as we move into the year. Q: That helps. And maybe drilling down a bit more detail on the incentive line item. So, it does look like incentives stepped up sequentially. Can you just breakout the difference between step-up in price discounting versus rate buydowns? And then I know you do buydown to some very below market rates in certain communities/units as low as 3.99%. I'm just curious whether the proliferation of those significantly below market buydowns stepped up in Q4. Thanks. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Yes, Sam. So, as we anticipated on our last call, we did expect to lean in more heavily to the offering of 3.99%. That is something that we've been doing, and we saw the mortgage rate in our backlog come down. It's actually below 5% today coming into this quarter, and we also saw a slight increase in the percentage of buyers sequentially that received a rate buydown overall, so that accounted for about 73% of our total closings in Q4, which was up from 72% sequentially. Q: All very helpful. Thanks so much. I'll pass it on. Operator Thank you. The next question will be from Alan Ratner from Zelman & Associates. Alan, your line is live. Q: Hey, guys. Good morning. Thank you for all the details so far. And apologies in advance, I got disconnected for a moment. So, if I repeat the question, I'm sorry. But first question, just a pretty solid order number, especially considering the start pace way down. Just curious if we can kind of talk a little bit about how demand trended through the quarter and whether you feel like that year-over-year order growth, is any indication of maybe a little bit of an improvement in demand as rates were Transcript Provided by coming down, or was there perhaps a little bit of a shift in incentive strategy? I know that incentives were up a bit for the quarter. Just curious if you kind of increased them in the back half of the quarter that might have driven some of that order increase. Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. I think we did see a decent demand throughout the quarter. It was choppy as rates were a little bit volatile, and that will push people off the couch and back onto the couch, it seems like with the headlines. But we did lean into the incentives pretty hard in the quarter, as we talked about, and we expected to. We did start a fair number of homes in our June quarter, and those homes were going to sell and close in September, and we have a few more in the backlog, that'll be closing out as well. But we moderated the starts pace to reflect a sales environment, as Paul says, to right size our inventory position, and leaning into our production improvements. The ability to compress the cycle time will allow us to deliver homes faster from start sale to delivery at closing. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. And so in today's environment, we'd expect our starts in the first half of the year to be up from our recent starts pace that we've had. Q: Got it. Okay. That makes a lot of sense. And then second question, just looking at your closing guide for 2026, up slightly year-on-year, obviously, your homes under construction are way down. It doesn't feel like there's anything today that would point to 2026 being an up year from a demand perspective. So, I'm just curious how you're thinking about kind of maybe the upside and downside risks to that closing guidance, obviously, it'll be dependent on the spring. But is this more you taking a view of, hey, we've got the communities opening, we want to put homes on the ground and kind of keep the machine running or is that actually your expectation that maybe lower rates a little bit, still solid economy that you feel a little bit more positive about the demand outlook heading into this year's spring versus last? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Alan, I would say that we are absolutely in position to deliver on the units in the guide, when you look at our community count being up 13% and that's been increasing double digits for some period of time. So, we're not assuming increased absorption per flag to achieve this guide. We have the production capacity throughout the industry we think to deliver on that. And we have what I would characterize as solid traffic in our communities today. There's some uncertainty and consumer confidence certainly is keeping people on the fence. So, ultimately, it's going to depend on the spring selling season and the strength of the market. But, we believe we're in position to deliver on our guide and feel good about our positioning today even with our total housing inventory at a lower number that's been purposeful, because we believe we have the ability to deliver the units in a timely fashion. Transcript Provided by Q: Makes sense. Thanks a lot. Operator Thank you. And the next question will be from Matthew Bouley from Barclays. Q: Good morning, everyone. Thank you for taking the questions. I have, I guess, a similar question to what Alan just asked, but want to add a little more to it around the gross margin side. And so, obviously, guiding to growth in a housing market that is not growing at the moment, and I hear you loud and clear on the community growth supporting that, but maybe in the context that the gross margins came in a little bit below the guide, even excluding the unusual litigation. So, I'm trying to understand if there's any signal there, kind of any conceptual change to that balance between growth and gross margin? And perhaps are you actually willing to maybe sacrifice a little bit of gross margin here in order to drive those volumes higher this year? Thank you. Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. I think we're continuing to respond to the market that's in front of us on a day-to-day and week-to-week basis at each of our communities. The growth in the community count and the lots that are available to us today in our portfolio that are ready to start homes on is probably unprecedented in the company's history relative to our outlook for the years. We feel like we have a lot of flexibility to lean into the strength that materializes in the market. And at the same time, we cannot continue to run the machine to a zero profit margin. That makes zero sense whatsoever. Q: Yeah. Got it. Okay. Understood. And then maybe just zooming in to the lot costs. So, I guess, it sounded like there was still a little bit of inflation sequentially. I'm just curious that kind of the very front end, whether it's development costs or kind of renegotiating with your land counter parties, et cetera, is there an outlook to either flattening or eventually improving lot costs and when may that begin to benefit you guys? Thank you. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think, Matt, given the mix of our overall lot portfolio and different age, I don't think you're going to see much of a shift in that over the next 12 months. We are seeing on the front end from a development cost perspective, some flattening there and some reductions that we expect to take advantage of in new lots that are going on the ground either for us or through our third-party developers. Not as much movement on the overall land valuation, but we are seeing favorable opportunity to renegotiate on terms and time to control our lot position and the number of lots that we own based on market conditions. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. And I think an even better opportunity that we look at in 2026 is renegotiating our stick and brick costs. Lot costs continue to be sticky and we're doing everything we Transcript Provided by can on that front, but we would expect our stick and brick costs to come down as we move throughout the year. Q: Got it. Thanks, guys. Good luck. Operator And the next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live. Q: Hi, good morning. Thanks for taking my question. I just wanted to ask on the second half, the delivery outlook seems like it's more second half weighted. Can you talk about like the starts pace and community ccount that you're assuming? How do we think about the cadence of that through the year? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think, overall, our starts pace needs to move up, right? I mean, at 14,600 starts this quarter, well below what we need to be doing on a quarterly basis. But, again, that's been intentional to get our inventory in the pace that we're looking for and feel good about our capacity and ability to start into the market. But, our starts are going to have to keep pace with or exceed our sales pace a little bit as we look at the first and second quarters into this year. Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. And with respect to community count, we've been seeing double-digit year-over-year increases in community count. We do expect that to moderate at some point more to the mid- to high-single-digit. But, right now, as we go into the year, we are double-digit. So that positions us well to not have to plan for higher absorptions in order to achieve our volume in our business plan. Q: Thank you. And then just following up on the last question, can you just tell us what the year-over-year increases on lot cost? And then what you'd expect that to be through 2026? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Yeah, I think we were 8% on a year-over-year basis on a per square foot for lot cost. And I think, as we've said, we do expect that to remain pretty sticky, at least on closings for the next year or so. And so, it's probably best case mid-single, but it could continue to be high-single as well as it takes a little bit longer for that ultimately to flow through in our closings. Q: Great. Thank you. Operator Thank you. The next question will be from Trevor Allinson from Wolfe Research. Trevor, your line is live. Transcript Provided by Q: Hi. Good morning. Thank you for taking my questions. First question is on demand in Texas. We've heard a couple of builders call out Texas as being among the weaker markets here, but your South Central orders were up 11% year-over-year. So, can you talk about what you're seeing there. Is it strong order performance decision to lean more into volumes, or you've got really strong community count growth that you see a lot of that come through in Texas, just any commentary on what's driving the good order growth there relative to some weaker commentary? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Trevor, I would describe Texas like a lot of markets and areas and geographies, and that's choppy. It's kind of market-to-market. We did lean in, as you saw in our margins, the incentives to drive the absorptions that we were looking for in the fourth quarter. Still have certainly bright spots throughout the state, but others that we still have an elevated inventory level that we and the industry need to work through in the coming months. Q: Okay. Thank you for that. And then second question, you've talked about getting your inventory lower in the quarter. You're also now talking though about increasing your starts pace here. So perhaps that suggests that you feel good about where your inventory is at. What about for the industry more broadly relative to demand? Do you think that the reduced starts pace here recently has brought inventory more in alignment with current demand conditions? Or do you think especially in some of these weaker markets that there's still room for inventory to move lower here late in 2025 and early in 2026? Thanks. Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. I do think the reduction in starts has helped to balance inventory market by market again it is market by market as you look at that. Across the board, our slowdown in starts also gives us the opportunity to work on re-pricing some of our stick and brick costs and the ability for us to sell houses and start houses and increase our starts pace is predicated upon the sales environment and the ability to reduce our vertical construction cost so that we can start houses. So, I expect to see that the inventory balance helping support a backdrop of increasing starts into our December and March quarters. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. I think we've had a lot of chatter about builders just being more rational today, right? And so, we are seeing the industry by and large adjust their inventory overall, so we don't end up in an oversupply situation in most of our markets. Q: Thank you for all the color and good luck moving forward. Operator Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live. Transcript Provided by Q: Good morning. Your repurchase guide $2.5 billion, I think, is kind of significantly below what you'll probably end up doing in 2025, despite cash generation could be somewhat similar year-over-year. Is that just caution early in the year or before the year starts? And then maybe more broadly, can you just talk about potential capital allocation priorities in 2026 in terms of step up in land purchase development or any other thoughts there? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Yes, we repurchased $4.3 billion in fiscal 2025. The guide of $2.5 billion is lower. It's all governed by our cash flow. This year, we have said several times in fiscal 2025, we had a unique situation coming into the year. We had a higher than normal level of liquidity coming into the year. So, we felt like we had some cushion there to utilize it and we took advantage of when our price was much lower to buy shares with that. We were also coming into fiscal 2025 below our leverage target. So, we had some room on our balance sheet and we did increase our leverage a bit and utilize that cash in our share repurchase as well. So, we had some unique opportunities in fiscal 2025 to lean in a bit, take advantage of the dislocation in our stock price. But going forward and over the long-term consistently, our share repurchases and dividends will be governed by our level of cash flow. And right now going into the year, every year has potential upside and downside relative to our business plan, but right now our baseline is we expect to generate $3 billion of cash flow and essentially distribute it to our shareholders, $2.5 billion of share repurchase, $500 million of dividends. And so, that's our baseline going into the year and then we will adjust as necessary depending on what the market shows us in the spring and, ultimately, what our cash flow generation is. Q: Okay. That's very helpful. And then when I look at your net sales order growth year-over-year by region, it looks like you have a relatively strong sales order growth except in the Southeast. And I'm just wondering if you can give any kind of additional color on the Southeast, if there are MSAs that are stronger or weaker or particular inventory challenges or just any kind of color you can give on that region and kind of where you are in terms of visibility into inflection there? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. Generally, within the Southeast, Florida is a big component of the company and that's a huge component of the Southeast region we report. There are some markets within Florida that have struggled with some inventory balance issues. Notably, Jacksonville and Southwest Florida have had some excess inventory and demand has been a while coming to absorb that. So that's kind of what you're seeing in the current quarter's results in the Southeast for us. Q: Okay. That's helpful. I'll turn it over. Operator Transcript Provided by Thank you. The next question will be from Michael Rehaut from JPMorgan. Michael, your line is live. Q: Great. Thanks, everyone. I appreciate you for taking my questions. First, I wanted to circle back to the gross margins for a moment, but look at it from a perspective of we've highlighted discussed the outlook for continued land cost inflation and the hope that that could be offset by lower labor material costs. I'm trying to get a sense for theoretically, let's say, from here on in so from the 20% to 20.5% gross margin expected in the first quarter. If land costs are going to be up, let's say, mid- to high-single-digits, what type of reduction would you need in construction costs to offset that so that gross margins would be flattish without any help from better pricing? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think absent of any pricing or reduction in incentives or breaks on the cost of our builder forward and financing, I think you need to see that somewhere in the 3% to 5% range. And, we'll see how that comes in over the year, but I've certainly seen our vendors interested in the starts pace increasing as are we. I mean, that's good for the industry, and they recognize that and they've been at the table with us to help do what we can to replace the homes that we're selling today with a more affordable home. And that's really the ultimate goal is to open up homeownership to more people. So, we do see the opportunity to balance the reality of the increased lot cost that we see over the next 12 months. Q: I appreciate that, Paul. And what were construction costs on a year-over-year basis for the fourth quarter? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. We were down 1% year-over-year and flat sequentially, and for the full year, we were down about 1.5%. Q: Okay. That's helpful. And then I guess, secondly, on some of the regional commentary, I guess, we've heard that Texas remains kind of choppy, I believe you said, in Florida some pain points. I guess I'm interested in if those are the two markets today that you'd consider broadly speaking, the most challenged across your footprint or how does California and Pacific Northwest fit in there? And then, if you've seen any change for the better or for the worse, marginally better, marginally worse, where you sit today versus 3 months ago? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think, California has also been a bit of a struggle. I think, we're seeing some strength or at least stability if you will across the Midwest and into the Mid-Atlantic. I think gauging it today compared to 3 months ago, I would say similar. And it truly is choppy. I mean and there's a lot of headlines and noise and we would have expected to see a little bigger bump out of the reduction in mortgage rates that we've seen and we've seen them come down a little more here recently. And hope that that turns into more people getting off the fence and into the buy box. But, we do see Transcript Provided by interest in our sales offices and we do see people out there looking for homeownership. Q: Great. Thank you. Operator Thank you. The next question will be from Ken Zener from Seaport Research Partners. Ken, your line is live. Q: Good morning, everybody. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Good morning, Ken. Q: I wanted to take a step back if we could, just because your orders are up. It's a big deal, right? In a market that is challenging. But could we start, first question, 20% gross margin guidance, while it's down sequentially, it's actually kind of in the range, if you take the historical view of the industry, that's pretty normal. So, do you think that, in fact, this could be the more normalized rate, given how much you've improved your asset efficiency in terms of upwards of two-thirds of your lots being bought, finished, A, and also can you talk to a lot of the homebuilders describe consumer confidence. The way I look at it, we describe it as job growth in Dallas is kind of half what it was historically. Phoenix has been kind of flat the last 6 months. Vegas has been a bit negative. And I'm asking this because aren't we actually kind of in a more environment where the consumer, while interest rates matter and affordability matters, there's just not a lot of job growth, so it's more of a traditional economic slowdown? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think that job growth certainly, I mean, absolutely has an impact on new household formations and consumer confidence. And where you see that flatness in those markets, that is going to have an impact on a go forward demand. We do still feel very good about our positioning across our markets and at the affordable price points and the need for housing, but ultimately, yes, Ken, we need to see consistent sustainable job growth to drive growth in the housing market. Q: And the 20% question? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. I think we feel pretty good where our margin profile is based on the disruptions we've seen in the housing market over the last year or two. And, we've adjusted accordingly, and the bottom-line op margin, we're still producing generally better than what our old historical norm would have been. I'm not ready to call a bottom on anything right now, but we do feel good still over the long-term about running on average sustainably higher pre-tax profit margins. Transcript Provided by Q: Okay. And then, I guess, you said incentives went up 120 bps. I know you guys haven't quantified it in the past. I think it would be good if you did. But you said high-single-digits in the past. Does 120 bps increase now bring us into low-double-digits in terms of incentives? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. No. It was a 110 basis point sequential increase, and we're still a high-single-digit percentage overall. Q: And no specificity, I take it, correct? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. No. I mean, we give you the gross margin detail that shows kind of our core lot level gross margin and then the things that also impact our gross margin below that that we've already talked to in terms of the outsized litigation costs. We also did in our supplemental presentation break out external broker commissions now. So, you'll see of the 110 basis points was related to increased broker commissions, which is to be expected when we're trying to drive incremental sales. Q: Thank you very much. Operator Thank you. The next question will be from Susan Maklari from Goldman Sachs. Susan, your line is live. Q: Hi, everyone. This is Charles Perron on for Susan. Thanks for taking my question. First, I would like to discuss the performance of operations in smaller markets where you have a larger market share. You've been successful in those markets in the past few years. Can you talk about the opportunities you're seeing there relative to your larger markets and how this influences your ability to outperform your market next year? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Yeah, I think we have seen, when we just kind of look at the beginning expectation or budget for some of those divisions, a higher level of able to achieve their intended absorptions. And, when we're in a lower competitive environment and we can react to the market, whether that's up or down and control some of those inventories a little better, we have seen pretty solid performance in some of those and feel good about our geographic footprint. We've expanded quite a bit into some of those secondary markets over the last couple of years and happy to see our divisions and our teams maturing in those markets. Q: Got you. That's helpful. And second, I want to drill down on the ASP a little bit. Considering the 3% growth in closings and flat revenue guide for next year, this suggests the potential for ASP pressure continuing into fiscal 2026. I guess, first, is this a fair assumption? More broadly, how do you expect the ASP to trend in 2026 Transcript Provided by should market conditions persist? And, how much of that would be driven by like-for-like pricing versus a mixed relative impact? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. Yeah, I mean, we continue to try to focus on affordability. That's one of the constraints in the market today. And so, our ASP has been trending down caused both by mix in terms of smaller homes and the mix of homes that we're providing, as well as the incentive levels that we're providing. So, our base assumption is that we will continue to see a net decline in ASP in fiscal 2026 for those same reasons. Q: Thanks for your time. Operator Thank you. The next question will be from Mike Dahl from RBC. Mike, your line is live. Q: Great. Thanks for taking my questions. I had another follow-up on kind of the starts and inventory dynamic. You guys did a great job on really significantly reducing inventory in the quarter. Now, at the same time, you're acknowledging that you do have to ramp starts pace consistent with how you've guided for the year. So, that's still absent market improvement suggests that you are going to ramp specs back up, which I understand is normal seasonally, but I'm trying to get a better handle on what exactly we should be thinking about in terms of your comfort level on ramping specs specifically back up into 1Q given the current market dynamics. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I would say our preferred path is to sell the homes earlier in the process and be building more backlog. We are going to need to see an increase in starts, whether those are for specs or sold homes. But with the speed at which we're building homes, the ability to deliver with predictability of delivery date and rate, even on a new start, we just don't need to carry as many total specs and feel comfortable with the spec count that we have, and we'll be managing that to the market as the sales come. Q: Got it. Okay. And then as a follow-up, you did just close on the acquisition of SK Builders in South Carolina. I was wondering if you could comment a little bit more on how much contribution you expect from that and then taking a step back, you've done a number of these kind of tuck-ins to help bolster market share at a local level and kind of firm up the growth, maybe give us a broader view on how you're seeing kind of the M&A and bolt on landscape for yourselves? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. I think the SK acquisition helps our positioning in Greenville, South Carolina market quite a bit. We picked up about 150 houses in inventory, another 400 lots on the ground today. And then sales orders on those homes in construction about two-thirds of them are sold. And then we got control of over 1,300 lots and good Transcript Provided by communities throughout the Greenville market that will help further leverage our operating platform in Greenville. And with what happened there, we continue to look at those tuck in opportunities to accelerate the pace of delivery of homes into those markets across the country. We tend to operate their capital structure, cost structure at a higher pace than some of the smaller builders do with some of the limitations they have on capital and cost. So, it's very accretive to our platform and we look to see people that are really good at the small local homebuilding are also generally very good at the local entitlement and some development operations and kind of decoupling their operations from entitlement development from homebuilding and splitting it between us and them works out really well for a long term win-win for both the seller and the D.R. Horton. Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. And if anyone's not familiar that was an October transaction that didn't happen during the quarter, so it's subsequent to year end. Q: Thank you. Operator Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live. Q: Thank you very much. I wanted to ask you about your view on interest rates and if you think a step down in mortgage rate will translate into further mortgage buydowns. In other words, if you will pass on that improvement to buyers in the new home market to maintain relative standing with the existing market. Or if you think those lower rates will actually alleviate some of the incentive pressure. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Jade, we're still solving for a monthly payment across most of our communities. And so, the ability to offer a lower rate than market and to solve for a monthly payment that allows people to move forward with the purchase is what we will continue to do. In a current environment, the reduction in rates generally has meant a little lower cost for us in the rates that we're offering. We're still largely at the low end about 3.99% rate that we're offering. And we'll just see as it comes. I think it's probably going to be a combination of both. In other words, if we need to step down some more to drive to the monthly payment to open up the absorptions that we're looking for at a community level to drive the returns that we want, then we'll continue to do that. And if rates drop down and we are allowed to reduce our incentive in terms of the cost of that BFC, we'll take advantage of some of that. So I'd expect it to be a balance as we look forward. Q: And in terms of buyer preferences on the incentive package, have you seen any shift toward outright lower home base prices or savings in other areas over mortgage buydowns? Transcript Provided by Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I think for our buyer, again, it still comes back to the monthly payment. And the most attractive monthly payment we can put them in is with a lower rate. And I think it's a benefit to the homeowner over time in terms of they're paying down more of their principal. And I think just overall, it's been a solid incentive and probably the most that people have taken and had interest in is still at the lower rate. Q: Thank you. Operator Thank you. The next question will be from Jay McCanless from Wedbush. Jay, your line is live. Q: Hey, good morning, everyone. So just wanted to follow-up on your comments. I think, Bill, you said that the exit rate on gross margins at the end of the quarter was lower than you guys expected. I mean, was that more incentives, higher lot costs? Maybe talk about that a little bit. And what have you seen so far in October? Bill Wheat - Executive Vice President and Chief Financial Officer, D.R. Horton, Inc. On a like-for-like basis, we landed about 40 basis points below the low-end of our guide for Q4. And really most of that we would put at the feet of incentives. What it took in order to get the sales for the closings that we needed to generate the volume to generate our returns for fiscal 2025 ended up being a little bit more than what we anticipated as we went into the quarter. And so, as we go into Q1, we'll be trying to strike the balance as best we can, but we are starting Q1 at a lower entry point than we did when we entered Q4. Q: Got it. Okay. And then, I can't remember who made the comment about this, but about lower rates seem to drive some traffic, but maybe not conversions. I guess, what are you all hearing from the field? Why aren't people willing to go ahead and pull the trigger? I mean, I know we've all talked about confidence ad nauseam at this point, but are there other things that you're hearing from the field that are keeping people from going ahead and stepping up and buying the home? Michael Murray - Executive Vice President and Chief Operating Officer, D.R. Horton, Inc. In some cases, they want to buy the home, it's a qualification issue for what payment they can afford. As Paul said, we're solving back for a payment, and we can align that payment that's attainable for them that they are compelled to do that and make that move. Other buyers with rates bouncing around being volatile, they're thinking, maybe I should wait for them to drop. Maybe I can't afford now, because they're spiking up. I think we'll see rates, if rates drop, we'll see an increase in the transactions in the existing home side, which helps relocate people and shuffle them around a little bit, and those folks will then, we'll be looking for different housing Transcript Provided by options at other places. And we see a lot of people with house to sale contingencies that come in that want to buy a house, but they can't get their house sold. Q: Got it. Okay. Thank you. Operator Thank you. And the next question will be from Alex Rygiel from Texas Capital. Alex, Alex, your line is live. Q: Thank you. What percentage of your buyers are using adjustable rate mortgages, and how has that changed over the last 12 months? Jessica Hansen - Senior Vice President, Communications, D.R. Horton, Inc. Sure. It's come from essentially zero- to mid- to high-single-digit percentage on closings this most recent quarter, and as we have introduced some new ARM products tethered to a rate buydown, I do think our base case would be that percentage continues to drift up, but it won't move sharply. Q: And then, secondly, as you reaccelerate starts, can you comment on the average square footage of the floor plans? Have you changed it much at all or do you expect sort of modestly smaller homes kind of for the foreseeable future? Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. I would say modestly smaller. Our square footage has continued to drift down slightly, but not a significant change over the last 12 months. I think where we are today and where we have to start coming, it'll be on the smaller end in the community, but we'll respond to the market as it comes. The good news about having the ability to sell early in the process is it opens up us to be more responsive to the market and not just responding with the inventory that we've already selected. Q: Thank you very much. Operator Thank you. This does conclude today's Q&A. I'll now hand the call back to Paul Romanowski for closing remarks. Paul Romanowski - President and Chief Executive Officer, D.R. Horton, Inc. Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our first quarter results on Tuesday, January 20th. Congratulations to the entire D.R. Horton family on a successful fiscal 2025. Due to your efforts, we just completed our 24th consecutive year as the largest builder in the United States. We are honored to represent you on this call and we look forward to everything we will accomplish together in fiscal 2026. Operator Transcript Provided by Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Transcript Provided by

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