D.R. Horton, Inc. (DHI) Earnings Call Transcript & Summary

Good morning, and welcome to the Third Quarter 2026 Earnings Conference Call for D.R. Horton, America's Builder. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the third quarter of fiscal 2026. 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 could 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 our supplemental data presentation can be found on our website at investor.drhorton.com, and we plan to file our 10-Q later this week. After this call, we will also post our updated investor presentation to our Investor Relations site on the Presentations section under News and Events for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO.

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. The D.R. Horton team delivered a solid third quarter, highlighted by earnings per diluted share of $3.20. Consolidated pretax income totaled $1.2 billion on $9.2 million of revenues resulting in a pretax profit margin of 13.3%. We closed 23,983 homes during the quarter, which was at the high end of our guidance range and achieved a home sales gross margin of 20.7%. We remain focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we generated $3.4 billion of cash from operations and returned all of it to shareholders through repurchases and dividends. For the trailing 12 months ended June 30, our homebuilding pretax return on inventory was 17%, while our consolidated returns on equity and assets were 12.8% and 8.5%. Our return on assets ranks in the top 20% of all S&P 500 companies for the past 3, 5 and 10-year periods, demonstrating that our disciplined returns-focused operating model delivers sustainable results and positions us well for continued value creation. We work every day to leverage our industry-leading platform unmatched scale, efficient operations and experienced teams to bring homeownership opportunities at affordable price points to more Americans. 65% of our mortgage company's closings this quarter were to first-time homebuyers. Our teams manage each community with discipline balancing pace, price, incentives and inventory levels to meet demand and maximize returns. Affordability constraints and cautious consumer sentiment continued to impact new home demand and our operators will continue to adjust as market conditions evolve. Mike?

Earnings for the third quarter of fiscal 2026 were $3.20 per diluted share compared to $3.36 per share in the prior year quarter. Net income for the quarter was $905 million on consolidated revenues of $9.2 billion. Home sales revenues in the third quarter totaled $8.7 billion on 23,983 homes closed compared to $8.6 billion on 23,160 homes closed in the prior year quarter. Our average closing price was flat sequentially and down 2% year-over-year to $362,000. This is below the average price of new homes in the United States by approximately $155,000 or 30%, reflecting our continued focus on affordability. Bill?

Net sales order value in the third quarter totaled $8.4 billion on 23,084 homes sold, both flat with the prior year quarter. Our cancellation rate for the quarter was 20%, up from 17% in the prior year period and from 16% sequentially within our normal historical range. The average number of active selling communities increased 2% sequentially and 9% year-over-year. The average price of net sales orders was $365,600, essentially flat both sequentially and year-over-year. Jessica?

Our gross profit margin on home sales revenue in the third quarter was 20.7%, above the high end of our guidance range, reflecting lower stick and brick costs and slightly lower incentives in the second quarter. However, we expect incentives to remain elevated relative to historical levels. On a per square foot basis, home sales revenues and lot costs were flat sequentially, while stick and brick costs were down 2%. Year-over-year, home sales revenue was down 3%, stick and brick costs were down 5% and lot costs were up 5%. We currently expect our home sales gross margin to be relatively flat in the fourth quarter compared to the third quarter. Bill?

Our homebuilding SG&A expenses in the third quarter increased 8% compared to last year. and SG&A as a percentage of revenues was 8.3%, up from 7.8% in the prior year quarter. We remain focused on managing our platform with discipline to gain market share efficiently and we expect to return to positive SG&A operating leverage when revenue growth resumes, and our average sales price and community absorption rates stabilize. Paul?

We started 23,900 homes in the third quarter and we ended the quarter with 38,000 homes in inventory, down 1%, both sequentially and year-over-year. 23,300 of our homes at June 30 were unsold. 7,600 of our total unsold homes were completed, of which 600 have been completed for more than 6 months. For homes closed in the third quarter, our median cycle time from home start to home close improved by roughly 3 weeks year-over-year. Our improved cycle times enable us to hold less housing inventory and turn it more efficiently. We expect starts in the fourth quarter to be lower than the third quarter, and we will continue to manage our inventory levels and start pace based on market conditions. Mike?

Our homebuilding lot position at June 30 consists of approximately 570,000 lots, of which 22% were owned and 78% were controlled through purchase contracts. We continue to actively manage our investments in lots, land and development based on market conditions. We remain focused on relationships with land developers across the country so we can build more homes on lots developed by others. This approach enhances our capital efficiency, returns and operational flexibility. Our owned lot position is down 13% from a year ago. And in the third quarter, 67% of the homes we closed were on lots developed by either Forestar or third parties, up from 66% in the prior year quarter. During the third quarter, our homebuilding investments in lots, land and development totaled $2.1 billion, including $1.5 billion for finished lots and $520 million for land development and $75 million for land acquisition. Paul?

In the third quarter, our rental operations generated $31 million of pretax income on $266 million of revenues from the sale of 601 single-family rental homes and 339 multifamily rental units. At June 30, our rental property inventory totaled $3 billion, including $2.7 billion of multifamily rental properties and $321 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations, and we currently expect our rental inventory to remain around $3 billion. Turning to our financial services operations. Pretax income for the third quarter was $70 million on $221 million of revenues, resulting in a pretax profit margin of 31.9%. Mike?

Forestar, our majority-owned residential lot development company reported third quarter revenues of $407 million on 3,659 lots sold with pretax income of $49 million. At June 30, Forestar's owned and controlled lot position totaled 92,000 lots. 66% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. During the third quarter, we purchased $360 million of finished lots from Forestar. Forestar's strong separately capitalized balance sheet, national operating platform and lot supply position them well to provide essential finished lots to the homebuilding industry and to continue aggregating significant market share over the next several years. Bill?

Our capital allocation strategy remains disciplined and balanced, supporting an operating platform that delivers attractive returns and substantial operating cash flows. We maintain a strong balance sheet with low leverage and healthy liquidity providing significant financial flexibility to adapt to changing market conditions and opportunities. At June 30, we had $6.1 billion of consolidated liquidity, including $2.1 billion of cash and $4 billion of available capacity on our credit facilities. Total debt at quarter end was $7.1 billion, with $600 million of homebuilding senior notes maturing over the next 12 months. Our consolidated leverage at June 30 was 23%, and we continue to target leverage of around 20% over the long term. During the first 9 months of the year, homebuilding cash provided by operations totaled $1.3 billion, and consolidated cash provided by operations was $881 million. During the third quarter, we paid cash dividends of $0.45 per share, totaling $127 million. and our Board has declared a quarterly dividend at the same level to be paid in August. We also repurchased 4.2 million shares of common stock for $616 million during the quarter, reducing our outstanding share count by 6% compared to a year ago. At quarter end, our stockholders' equity was $23.8 billion, down 1% from a year ago, while book value per share increased 5% from a year ago to $84.85. Jessica?

Looking ahead to the fourth quarter, we currently expect consolidated revenues to be in the range of $8.8 billion to $9.3 billion, with homes closed by our homebuilding operations to be in the range of 22,500 to 23,000 homes. We expect our home sales gross margin for the fourth quarter to be in the range of 20.5% to 21% and our consolidated pretax profit margin to be between 12.3% and 12.8%. For the full year of fiscal 2026, we now expect consolidated revenues of approximately $32.5 billion to $33 billion and homes closed by our homebuilding operations, of 83,800 to 84,300 homes. We now forecast an income tax rate for fiscal 2026 of approximately 25% and still expect operating cash flow of at least $3 billion common stock repurchases of approximately $2.5 billion and dividend payments of around $500 million. Paul?

In closing, our results and positioning reflect the strength of our experienced teams industry-leading market share, broad geographic footprint and focus on delivering quality homes at affordable price points. These are key components of our operating platform that support our ability to grow market share generate substantial operating cash flows and consistently return capital to our shareholders. We recognize the current volatility and uncertainty in the broader economy, and we will remain agile and disciplined as we focus on enhancing the long-term value of D.R. Horton. Finally, I want to thank the entire D.R. Horton family, our employees, land developers, trade partners, vendors and real estate agents for your continued dedication and hard work. We remain committed to continuing to improve our operations and creating homeownership opportunities for even more individuals and families. This concludes our prepared remarks. We will now host questions.

[Operator Instructions] And the first question today is coming from John Lovallo from UBS.

The first one is that stabilization is something that we've heard numerous times in our channel checks despite what's been continued volatility from not only an interest rate but a geopolitical standpoint, I mean, would you agree with that assessment? And do you think that we're kind of getting to a point where we're starting to form a bottom here?

I would say that when looking at our sales, our sales were relatively in line with normal seasonality for a little softer post our call in April and still see plenty of buyers out there in our sales offices as we travel and in front of people, it's just needing to see them be a little more confident in the overall economy and their ability to move forward with a sale -- with a purchase today.

Understood. And you guys slightly pulled back, I think, about 3% on your full year deliveries despite being -- within actually towards the upper end of the third quarter range and with flattish orders on a year-over-year basis. So I guess, is the trimmed outlook predominantly driven by just uncertainty in consumer confidence and geopolitics as we move into the fourth quarter, is it a function of maybe lower than internally expected orders in the third quarter? Or are you just kind of moderating growth to maintain margin?

It was lower than our internal expected sales rate. We really kind of needed to see a little better than normal seasonality in the quarter and felt like we could see that at the beginning of the quarter that demand softened a little bit as we went through the quarter and hence, the reduction in our annual guide.

But to your point, John, happy with the trade-off of what we were able to achieve from a gross margin perspective at the lower sales volume level.

The next question will be from Stephen Kim from Evercore.

Impressive results in what I consider to be a pretty tough environment, but that's kind of related to my first question. When you think about the current environment and you look at your outlook for, let's say, long-term through cycle returns, how do these current results stack up relative to that? Like do you regard your current returns is about average longer term? Or if not, what are the elements that you expect might push your returns higher or lower over the longer term?

Yes, Steve, our current returns are lower than where we expect them to be longer term. We have our margins. While in the longer-term historic range, we believe our longer-term stabilized margin should be a bit higher than this. Our operating margin, including our SG&A leverage should be better than this over time, when we're seeing some more consistent growth, we have not seen growth on our top line for a few years here. And so we're always positioning for growth and so with a little better operating leverage. And frankly, I think we still feel like we have some opportunity to improve our capital efficiency in our homes and inventory and our land. So we continue to focus on that. So overall, we would expect our returns on our capital, whether it's ROA, ROE, both to be higher longer term than they are right now.

That's encouraging, and I appreciate that color, Bill. Second question kind of relates to scale? And I think you talked about when growth returns, that's when you think SG&A could be leveraged and that makes sense. However, I was curious if you could contextualize that given the fact that we've seen a lot of consolidation in the industry from competitors, let's say, both foreign and domestic. I'm wondering if you can comment on how you think about your opportunity set from a scale perspective, particularly, I know you've been hard at work generating a lot of economies of scale and your volume is kind of stabilized here. But you still talk about future growth. And so I'm curious, can you talk about what the importance of scale for you to achieve the efficiencies that you desire. Should we be thinking there's another sort of step function higher in volume that could unlock some of these opportunities? Or maybe you could think about it a little differently, you could walk us through that.

Steve, when you look at our scale today or at our revenues and absorption being relatively flat over the last couple of years, that's why we have been expanding our footprint. We've opened or so markets over the last 5 years, and we've lacked some leverage on our SG&A because of creating that foot. But I think that, that footprint geographically puts us in a great position as we see demand rebound a little bit. We see some strengthening in consumer confidence and demand. We feel we're in a great position to gain scale nationally. We also feel very good about our positioning at a local level. That scale is still very important to us. We see the benefits of it, believe in it, talk about it and still have our operators in a position to maintain their position in the market and grow when the opportunity is there for us.

And as a reminder, we're only #1 only in half of the markets we operate in today. So we still have a lot of opportunity to continue to grow our share locally across the country.

That's great perspective. Appreciate that, guys.

The next question will be from Alan Ratner from Zelman.

Obviously, very impressive results on the gross margin. It looks like a lot of that has been driven by really strong cost controls. And I'm curious, as you think about the cost environment today, Obviously, you've done a great job of pushing back on suppliers and trade and driving down costs where you can. Where do you think you are in that process? Because as we look at, at least the [indiscernible] announcements on Canadian Concrete. I'm not sure how big of a piece of your business that is fuel remains elevated. So do you feel like there's still further room to drive costs lower? Or is there a risk over the next handful of quarters that, that could actually reverse given all of those headwinds I just mentioned.

We lost a little bit of your question, Alan, but I think I got the gist of it. We've seen good improvement in our cost containment efforts in comparison to the prior year but it's an ongoing battle. And there is certainly some headwinds out there right now with some fuel cost increases. I don't believe that Canadian recently announced Canadian tariff changes are going to have a material impact on D.R. Horton. in our footprint. But looking for us to hang on to perhaps squeeze out a little additional cost improvements in future quarters, but it's more challenging now just as you get closer to an optimal state to get significant improvement going forward.

The next question will be from Matthew Bouley from Barclays.

I wanted to ask on incentives. I think you said the incentives were slightly lower quarter-over-quarter. And so you mentioned demand softened a bit during the quarter. It looked like finished spec came up slightly and obviously, interest rates are where they are. But it seems like, obviously, you're still guiding to that flattish sequential gross margin going forward. So maybe you can just kind of unpack what's assumed around incentives there. And why wouldn't there be kind of an incremental incentive headwind going forward?

Well, as in the current environment, we saw a slight improvement in incentives, but as Paul mentioned, it was a bit softer later in the quarter. So we do expect incentives to remain elevated. And as Mike just discussed, we may still see some stick and brick savings, but we have achieved a lot of what we expect to achieve today. So really, where we see where we are is a relatively stable outlook going into the next quarter. Obviously, a lot of our sales and our closings in the quarter occur in the same quarter, so there's still some uncertainty around what may be required going forward. But right now, the visibility we have points to a relatively stable margin going into Q4.

Okay. Got it. And then secondly, stepping back, I wanted to ask about your exposure to the first-time buyer. I think it looks like it's -- you're around 2/3 today, first-time buyer. And we can go back any number of years once upon a time, that was half the business, maybe even less than half the business. So it's been a very steady mix towards that first-time buyer. And so given the state of the first-time buyer today, would you say that the kind of 2/3 of the business you're at now maybe stabilize do you expect it to actually continue to move higher if you kind of look at it as we are kind of the answer to the affordable needs of the country today? Or would you actually look at it and say, you know what, we -- maybe we actually do want to mix a little bit back towards that kind of first-time move-up buyer. So just curious on how you're positioning the business from that perspective on a multiyear time frame.

The positioning of our business today lends itself to still seeing significant portion of our buyers, I think, in that 2/3 range as first-time homebuyers there's some opportunity to go up some. We'll certainly take it. If we see more buyers out there, we're happy every day to sell them a home. That said, as we penetrate markets, we also take the opportunity to move upmarket a little bit. So I think blending that at a community level and at a division level, our operators are charged every day to find the market, go meet that market. But I would expect us to see a first-time homebuyer segment relatively consistent with what we see this quarter.

The next question will be from [ Eric Bosshard ] from Cleveland Research.

The stick and brick down 5% curious where you're seeing that if labor is a meaningful piece of that? And then the path forward you expect from here and how this is influencing or contributing to gross margin?

Sure, Eric. The majority of the savings we're seeing is still on framing, which will be inclusive of labor. As I think we've talked about previously, we pay for a lot of things turnkey. So we can't split it out for you perfectly labor versus materials. But framing was our biggest cost category of savings. Very positively, though, across all of our major cost categories, we saw a decline in terms of our costs on closings in the third quarter. And so I think we expect that to hold at least into Q4. Maybe into '27, we start to have a slight lumber headwind again with where lumber prices have gone, but we feel good for at least the next quarter or so.

And then in terms of how that is supporting gross margin or supporting the ability to increase incentives, how are you thinking about that or planning that? Or how is that playing out?

Incentives and the cost -- the stick-and-brick cost structure and incentives in our mind are kind of separate things. We think about the home we want to deliver on a lot, try to build it as efficiently as possible. And then look to go to market with the appropriate price and incentives that stimulate demand in the marketplace to get the pace we need to drive the return we need and then manage the return on the basis of trying to pull back or increase incentives to stimulate demand or to improve margin, 2 separate parts of the equation for us.

And then secondly, you were relatively clear that in the quarter, a little less volume, a little bit more margin. Is this the path forward strategically? I know it moves around, but is that kind of plan A from here?

That was our plan this past quarter, and we're going to respond to the market based on what we see quarter-to-quarter, month-to-month, really week to week. So we're managing our business I think very efficiently responding to the market as it comes to us. Our operators did a great job of delivering on the quarter in terms of our guidance in closings and in margin. We did make the decision to hold margin a little more then push into the units and hence, the reduction in our guide for the year. But we're going to continue to manage the business as efficiently as we can to drive the best returns that we have at a community level.

The next question will be from Sam Reid from Wells Fargo.

You gave a lot of helpful color on lot cost inflation. I believe it was up 5% year-over-year in the third quarter. Curious as to what's embedded for lot cost inflation in the fourth quarter and then contextualize where you see that line item potentially tracking into next year, whether you expect to get some help just from Slack in the horizontal supply chain or whether there could be some implications from higher oil costs on some of those horizontal lot inputs.

We expect to see similar lot cost appreciation, although we're seeing some savings and some benefit in the development costs that won't come through for several quarters, well into '27 and '28, anything that we are seeing today. So expect to see similar level of log cost inflation as we head into the fourth quarter.

That's helpful. And maybe let's switch gears and quickly touch on SG&A. There was a step up in SG&A spend on a dollar basis. I realize there was probably some community count embedded in that. But just if you could contextualize some of the levers behind the higher year-over-year homebuilding SG&A dollars just so we can understand how we should be thinking about that both for the quarter and also for Q4.

Yes, Sam. The primary driver of the SG&A has been our community count increase. Our active communities were up 9% year-over-year. Our total dollar spend of SG&A was up 8%. So relatively in line there, and that's been a trend for the last 2 to 3 years as we've added 30 markets over the last several years. So -- but yes, our volume -- so our absorptions per community have declined a bit, and so our overall revenues have not increased, and we've been adjusting our ASPs to meet the market as well. So we've had some deleveraging over the last couple of years, but at the point at which we do begin to see stabilization in pricing and absorption pace, we would expect them to be in a position to get forward operating leverage on SG&A. But right now, we're in a position where we've built the infrastructure, and we need to see the growth coming off of that in the future.

The next question will be from Ryan Gilbert from BTIG.

I want to circle back on the finer spec inventory question. does look like finished specs are up around 2,100 homes sequentially. I think that's more than the typical sequential increase. Is that more than you expected? Is that tied to some of the softer results in the I guess, May and June versus what you saw in mid-April. And then how should we think about potential gross margin implications for rightsizing the spec count?

So we look at the spec count, it's a function of a few things. One is some improvements that we continue to see in our construction cycle times. So we're finishing homes faster. At the same time, our average selling communities are up 9%. So that's up more than those completed specs are up. Therefore, we have fewer per community at this time. And then the other part to the forward margin piece, those completed specs are very recently completed. You can look at our aged specs, and they're actually down a few hundred units year-over-year. And so we feel pretty good about going into the fourth quarter, able to provide a stable margin guide.

Yes. And as we said in the scripted part, we do expect our Q4 starts to be lower than Q3 and we'll continue to adjust our starts accordingly based on the demand that we're seeing. Of our total completed specs, only 600 have been completed and unsold for greater than 6 months, and that's actually down from 800 sequentially. So to Mike's point, the vast majority of our completed specs are very fresh.

Right. Okay. Yes, that makes sense. And then second question is on community count growth. I think you've talked in the past about that growth rate decelerating to kind of a mid-single-digit rate at some point in time. I'm just wondering, given the continued declines in the control block count, should we recalibrate that mid-single-digit growth rate expectation? Or do you think you can continue to grow community count despite lower control bots?

Yes. I think that would still be our base case over the longer term is that our goal would be to have a roughly mid-single-digit community count growth. It can be a little bit choppy. It's actually been sticky at the low double digits for quite some time. We did see a slight moderation to a 9% increase on a year-over-year basis this quarter and 2% sequentially. So did start to see it trend down modestly and would still expect it to trend down to mid-single digit over time.

The next question will be from Anthony Pettinari from Citi.

I was wondering if you could talk about any meaningful regional variation you're seeing in terms of demand and any MSAs that stand out as being stronger or weaker. And I guess, related question, we've heard about some MSAs with tech exposure being strong, like big area, some others like Seattle being weak. Is there anything you're sort of observing there? It's kind of sometimes hard to tell whether that's a plus or minus, but...

I think what you just mentioned is consistent with what we're seeing and fairly consistent with what we talked about last quarter on the call is that across really the -- what we show as our North operating area, which is the Mid-Atlantic states, the Ohio Valley, the Midwest seeing relative strength in most of those markets. little more weakness out in the Northwest and especially as you look up into Seattle, where we've seen some of the shift in the software jobs and more layoffs and some headwinds to demand in those markets. and that's pretty consistent with what we've seen through this quarter.

Okay. Okay. And then any other regional variations that you'd highlight in terms of, I don't know, Sunbelt or Northeast or...

The Florida market seems to be performing pretty consistently at this point in time and some of the same across the Southeast. So it's been pretty encouraging.

Right. Great. And then I guess one last one. Sticking brick costs down year-over-year, you've taken down cycle times year-over-year. Is there sort of a theoretical limit or for cycle times? Just generally, how should we think about that?

You'll never hear us say there's a floor in terms of our ability to run our business more efficiently. That said, the reduction has come more from complete to close than it has from our start to complete. In other words, in the construction cycle time, we've come down maybe a day, I think sequentially, and most of that reduction has been from complete to close. So our focus in the field and our operations in our communities is to sell the homes earlier in the process. We're building homes at the most efficient rate that we have in the history of the company. And so we need to get back to selling homes earlier in the process that will help reduce that overall start to close cycle time, and we do think there's some room to bring that down further.