D.R. Horton Aktie

Good morning, and welcome to the Second 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 second 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 & 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 solid second quarter results with consolidated pretax income of $867 million on $7.6 billion of revenues and a pretax profit margin of 11.5%. New home demand remains impacted by affordability constraints and cautious consumer sentiment. However, our tenured teams continue to respond to current market conditions with discipline.

During the quarter, we delivered a consolidated pretax profit margin above the high end of our guidance range, generated revenues within our expected range and increased net sales orders by 11% compared to the prior year quarter. At the same time, we reduced our unsold completed homes by 35% from a year ago, reflecting our focus on balancing sales pace, pricing and incentives to drive incremental sales while maximizing returns.

We continue to focus on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we generated $3.7 billion of cash from operations and returned $4 billion to shareholders through repurchases and dividends. For the trailing 12 months ended March 31, our homebuilding pretax return on inventory was 17.6%, while our consolidated returns on equity and assets were 13.2% and 8.9%. Our return on assets ranked 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.

Our sales incentives increased during the second quarter, and we expect incentives to remain elevated for the rest of the year with a level dependent on demand, mortgage interest rates and other market conditions. 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. We will continue to tailor our product offerings, sales incentives and inventory levels based on demand in each of our markets to maximize returns.

Mike?

Earnings for the second quarter of fiscal 2026 were $2.24 per diluted share compared to $2.58 per share in the prior year quarter. Net income for the quarter was $648 million on consolidated revenues of $7.6 billion. Home sales revenues in the second quarter totaled $7 billion on 19,486 homes closed compared to $7.2 billion on 19,276 homes closed in the prior year quarter. Our average closing price was $361,600, down 1% sequentially and down 3% year-over-year. Our average sales price on homes closed is below the average price of new homes in the United States by approximately $160,000 or about 30%, reflecting our focus on affordability. In addition, the median sales price of our homes is approximately $70,000 lower than the median price of an existing home.

Bill?

Net sales orders increased 11% year-over-year in the second quarter to 24,992 homes, while total order value increased 10% to $9.2 billion, in line with our business plan and expectations. Our cancellation rate for the quarter was 16%, consistent with the prior year period and down from 18% sequentially. The average number of active selling communities increased 4% sequentially and 11% year-over-year. The average price of net sales orders was $366,300, up 1% sequentially and down 2% compared to the prior year quarter.

Jessica?

Our gross profit margin on home sales revenue in the second quarter was 20.1%, which included a 40 basis point benefit from a favorable litigation outcome and lower-than-normal warranty costs. Assuming normalized warranty and litigation costs, our home sales gross margin would have been 19.7% in the second quarter, slightly higher than our guidance range.

On a per square foot basis, sequentially, home sales revenues and stick and brick costs were both down 2% while lot costs were essentially flat. Year-over-year, home sales revenue and stick and brick costs were both down 4% per square foot, while lot costs were up 4%. We currently expect our home sales gross margin to be 19.7% or slightly higher in the third quarter as we expect to realize additional construction cost savings on homes closed. Incentive levels and gross margin for the remainder of the year will continue to be dependent on demand, mortgage rates and broader market conditions.

Bill?

Our homebuilding SG&A expenses in the second quarter increased 2% compared to last year, and SG&A as a percentage of revenues was 9.2%, up from 8.9% in the prior year quarter. The year-over-year increase in our SG&A expense ratio was primarily driven by lower home closings revenue, reflecting the decline in our average sales price. We continue to manage our platform with discipline and remain focused on gaining market share efficiently while driving operating leverage over time.

Paul?

We started 27,500 homes in the second quarter and we ended the quarter with 38,200 homes in inventory, of which, 22,900 were unsold and 5,500 were completed and unsold. Our completed unsold homes are down 25% from December and 35% from a year ago, with both unsold homes as a percentage of total inventory and completed unsold inventory at their lowest levels since fiscal 2023.

For homes closed in the second quarter, our median cycle time from home start to home close improved by almost a month year-over-year. Our improved cycle times enable us to hold less inventory and turn homes more efficiently. We expect starts in the third quarter to be lower than the second quarter, and we will continue to manage our inventory levels and start pace based on market conditions.

Mike?

Our homebuilding lot position at March 31 consisted of approximately 575,000 lots, of which, 23% were owned and 77% were controlled through purchase contracts. We are actively managing our investments in lots, land and development based on current market conditions.

We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others. This approach enhances our capital efficiency, returns and operational flexibility. In the second quarter, 67% of the homes we closed were on lots developed by either Forestar or third parties, up from 64% in the prior year quarter. During the second quarter, our homebuilding investments in lots, land and development totaled $2.1 billion, including $1.5 billion for finished lots, $500 million for land development and $120 million for land acquisition.

Paul?

In the second quarter, our rental operations generated $12 million of pretax income on $212 million of revenues from the sale of 566 single-family rental homes and 216 multifamily rental units. At March 31, our rental property inventory totaled $3 billion, including $2.7 billion of multifamily rental properties and $347 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 second quarter was $52 million on $193 million of revenues, resulting in a pretax profit margin of 26.8%.

Mike?

Forestar, our majority-owned residential lot development company, reported second quarter revenues of $374 million on 2,938 lots sold, with pretax income of $44 million. At March 31, Forestar's owned and controlled lock position totaled 94,000 lots. 65% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton.

During the second quarter, we purchased $280 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 aggregate 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.

During the first 6 months of the year, homebuilding cash provided by operations totaled $619 million and consolidated cash provided by operations was $442 million. During the second quarter, we repurchased 6 million shares of common stock for $904 million, reducing our outstanding share count by 8% compared to a year ago. We also paid cash dividends of $0.45 per share, totaling $130 million, and our Board has declared a quarterly dividend at the same level to be paid in May.

At quarter end, our stockholders' equity was $23.6 billion, down 3% from a year ago, while book value per share increased 5% from a year ago to $82.91. At March 31, we had $6 billion of consolidated liquidity, including $1.9 billion of cash and $4.1 billion of available capacity on our credit facilities. Total debt at quarter end was $6.6 billion, with $600 million of homebuilding senior notes maturing over the next 12 months. Our consolidated leverage at March 31 was 21.7%, and we continue to target leverage of around 20% over the long term.

Jessica?

Looking ahead to the third 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 23,500 to 24,000 homes. We expect our home sales gross margin for the third quarter to be in the range of 19.7% to 20.2%, and our consolidated pretax margin to be between 12.2% and 12.7%.

For the full year of fiscal 2026, we now expect consolidated revenues of approximately $33.5 billion to $34.5 billion and homes closed by our homebuilding operations of 86,000 to 87,500 homes. We continue to forecast an income tax rate for fiscal 2026 of approximately 24.5%, 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 aggregate 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 continue to adjust to market conditions with discipline 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 hard work and commitment. We look forward to continuing to improve our operations and expand homeownership opportunities for more individuals and families throughout fiscal 2026.

This concludes our prepared remarks. We will now host questions.

[Operator Instructions] And the first question today is coming from Alan Ratner from Zelman.

Really nice job in a tricky environment. So congratulations. First question, I would love to drill in a little bit more on the gross margin outlook. It sounds like adjusting for the various warranty and litigation charges, it sounds like you're expecting pretty stable margins sequentially, which is very encouraging given what's going on.

I know you mentioned you have some tailwinds there from lower construction costs. I was just curious if you can kind of give a little more detail on what you're seeing on that front lately, especially with the higher oil prices of late. We're starting to pick up some chatter about fuel surcharges from suppliers and trades. And I'm curious, if you're experiencing that in general, what your outlook there is maybe beyond the third quarter if oil remains near current levels?

Sure. As we've discussed in prior quarters, we focused to do out our operations on sitting down with our trades and working our costs down as we held our starts back in Q4 and Q1. I feel good about what has been accomplished there. It's an ongoing effort, will continue to be ongoing. But we can now see in our construction cycle and our construction -- our homes under construction, lower costs coming through. And so we've started to see the front end of that in the current quarter that we're reporting, and we can see a bit more of that coming through next quarter. And so we expect to see some incremental benefits in Q3 and Q4.

With respect to recent inflation, potential inflation from oil prices, that's something we'll be monitoring closely. Right now, we have nothing tangible to report in terms of anticipating inflation from that. But if we were to see an extended period where oil prices stayed elevated for an extended period, then there could be some pressure. If it remains a relatively temporary period, we wouldn't expect too much impact.

Great. I appreciate that. Second question on the rental segment. I know it's not necessarily an area of growth for you guys, but obviously, a lot of noise with the outstanding extended bill related to BFR. I see you did sell 500-plus homes in single-family rental this quarter. Just curious if you could talk about the demand you're seeing kind of -- for going forward on BFR and whether you think this is going to kind of cause a bit of a pullback in activity in your rental segment beyond '26 if it does come to fruition?

We still see interest out there, but there is uncertainty around the legislation, and I think a little bit of a pause in terms of people waiting to see how that plays out specifically as it relates to the 7-year potential sale requirements.

Generally speaking, we have underwritten our build for rent communities as for sale. So if need be, as we go forward, we can move those if needed. We also have focused the majority of our forward business on forward sales. In other words, we aren't starting those unless we have a contract and firm commitments. And so I feel good about our positioning there, not overly relying at all on having that business continue to be able to hit certainly our guide, and feel good about our positioning in the space.

The next question will be from John Lovallo from UBS.

The first one is, how would you sort of characterize demand in March relative to normal seasonality? And the reason I ask is we've had certain checks that indicate normal seasonality sort of occurred each week through the first week of March and then sort of leveled off as the war started. Other checks have indicated they saw normal seasonality all the way through March, notwithstanding the war. And then I'm curious also what you're seeing year-to-date in April from a seasonality standpoint?

I would say the demand was good. We saw sales in line with normal seasonality, kind of as we expected and hoped throughout the month, and we're pleased with our sales results through mid-April at this point. But it's only the middle of the month at this point.

And our cancellation rate was stable throughout the entire quarter.

Yes. No change in that.

Yes. No, that was encouraging. Okay. And then on the order ASP of $366,000, it seemed to stabilize a bit here in the second quarter. It was actually up, I think, quarter-over-quarter for the first time since maybe the second quarter of '24. I mean was there any notable mix impact to call out there? And do you think we sort of found the floor on order ASP or close to it at this point?

I don't know that there was a notable mix for that impact. Our incentives do remain elevated as we had called out. And we're not going to call a floor relative to the market, and demand will depend on what we see through the remainder of the spring and into the summer selling season.

The next question will be from Stephen Kim from Evercore ISI.

Yes, strong results here in a tough market. I wanted to ask you about the incentive environment. You called for incentives remaining elevated through the remainder of the year. And I'm curious if you've seen any changes in trends worth calling out in terms of perhaps maybe an increase in the use of arms or temp buydowns. If you could just give us a sense for what you're seeing in terms of recent trends or recent activity in terms of how your incentives are tracking?

Sure. On the ARM front, we ran about 10% of our closings, at least through a mortgage company this quarter, more an ARM product. That's down from 13% sequentially, but it is up from essentially 0 a year ago. We are incentivizing. We've got products out there that are ARM incentives. So we are not surprised by that tick up. It's been somewhat strategic. I don't know that we expect it to grow materially from here. It could bounce around in that 10% to 15% range would be my guess today.

And then in terms of just the buy down overall, we did have 90% of the buyers that utilized our mortgage company get some version of a permanent and/or a temporary buydown this quarter, which is up on our overall closings. That's roughly 73% of our closings had some form of a buydown.

And could you give us a sense for overall, what incentives may, in aggregate, represent as a percentage of the, maybe the MSRP, the initial home price? And whether this has been -- it's been -- whatever it is, I'm sure it's obviously elevated, as you indicated. It sounds like there's no expectation to sort of bring that down, at least as far as you can see this year. And I'm wondering how would you respond to folks who are worried that this is becoming a new normal, that the buyer has become conditioned to expect very elevated level of incentives. And do you still have the same confidence that you had, let's say, 3 years ago when we started getting into this mess that you're going to be able to bring those incentives all the way back down to the level they historically were.

Steve, the incentives as a percent of revs is roughly 10%. And as it speaks to that level of incentives relative to market, rates have remained relatively stable. They've been somewhat range-bound, and we've stayed pretty consistent in the rates that we're offering. Therefore, that cost of those rates has stayed relatively stable in terms of the total incentive package. That being the most significant incentive that we are giving.

I think we're going to need to see rates moderate some before we see that break up, and/or an increase in consumer confidence and more buyers in the market that allow for a reduction in incentive and over time, eventually, some increase in base house pricing. But we incentivize and look at that on a community by community level. We do have communities that we see a reduced incentive level. We haven't seen that come in aggregate when you look at our overall revenues. And as we focus on selling earlier in the process, we see the opportunity to hold back on some of those incentives as well.

The next question will be from Ryan Gilbert from BTIG.

Just first question on selling -- what you just said on selling homes. Earlier in the process, it does look like based on the backlog data, you've been able to sell more homes before they've been completed. Is that just a function of the drop in standing inventory? Or are you able to offer more incentives on homes under construction than you have been able to previously or have consumer preferences shifted away from completed spec?

With our cycle times where they are today, we're able to sell earlier and still put them into the BFC if that's the incentive that we're needing to get them across the finish line, whereas before construction cycle times were elongated and we weren't able to do that. But usually, when we sell a home earlier, we actually see a gross margin lift versus selling a home later.

Okay. Got it. And then second question on starts, pretty big year-over-year pickup. Did you increase starts throughout the quarter? Do you need to make any adjustments as a result of the Iran conflict? It sounds like potentially not based on the third quarter guidance. But yes, any color on the starts gains throughout the quarter? And then if you think 3Q will also be down on a year-over-year basis in addition to sequentially?

On the starts for the quarter, we maintained our plan for the quarter, throughout the quarter, and we felt really good with the sales demand we saw. So the starts plan was in line and continued. I think we'd be -- expect to be seeing starts down sequentially in Q3, but likely roughly flat with what we had last year, somewhere in that range. Obviously, dependent upon the sales environment at a community level.

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

Just wanted to talk through the cycle time benefit you got in the quarter relative to last year. I know this came up a little bit on the prior question. But how much of the 1-month improvement was explicitly from lower construction cycle times versus shorter complete to close? And then can you talk to any sequential benefits you might have gotten from that lower complete to close in Q2 versus Q1?

Our complete to close was down about a week sequentially, which is good. We still have room that we can improve that further. But a week quarter-over-quarter is a good start.

No, that's awesome. Helpful to hear. And then I know your red tag sale, I believe that's ongoing right now. Can you just remind us whether there are any timing differences between the sales this year versus last year? And maybe any tweaks to incentives we should be mindful of on the red tag sale? I mean I know you run it fairly regularly, but always trying to get a sense for any changes at the margins.

We've been consistently doing a red tag sale normally around the start of our fiscal quarters, and the incentive levels vary by community, by submarket. No, I won't say there's anything different in timing this year or anything really different in the incentive levels we're looking at in the aggregate. We have a little less completed inventory today in today's -- the current red tag sale than we did in the prior red tag sale.

And the next question is coming from Matthew Bouley from Barclays.

So I wanted to first get a sense of what led the margins to be above your guidance and presumably with that continuing to how you're thinking about Q3 here. So was it kind of a reflection of the 6% mortgage rate environment we had from earlier this year? I mean it sounded like lot costs at 4%, probably a little bit lower than what we've seen recently, maybe more success on stick and brick than you had thought. Just sort of how do you bucket all that out?

I think it's a combination of all those things. We've seen some reduction in stick and brick come through that Bill spoke to less reduction of the increase of lot price. So those somewhat offsetting. And then we saw a fairly strong quarter from a demand perspective. And just under 25,000 homes sold in the quarter allowed us to hold incentives, maybe a little more than we had anticipated, and that's the result of our margin being at the high end or above our guidance.

Got it. Okay. No, that's perfect. And then secondly, I wanted to dig in back to that ARM's question. So I guess, number one, was there any more sort of temporary buydowns on top of the ARMs? Or is that 10% you mentioned kind of the whole thing. But then more specifically, I guess, going from 0 to 10% or if it's more with the temporary buydowns, like is there a rule of thumb? Or how would that impact your homebuilding gross margins relative to your financial services margins as well?

I don't think the -- it had a really significant material impact on the company. I think the ARM product has been pretty slow on the uptake this time versus prior cycles and people definitely prefer a 30-year fixed rate mortgage. And it is up 10% from 0 last year, but it's down 3% from Q1. So it's not having a significant impact truly on margins at the homebuilder with the financial services team at this point.

The next question will be from Anthony Pettinari from Citi.

On stick and brick, you talked about trends in building products costs. I'm just wondering if you could talk a little bit more about the labor piece, what that is year-over-year? And is there kind of an opportunity to keep driving that down on a year-over-year basis? And sort of what you're doing there?

We are seeing consistent labor and plenty of labor in the market. Hence, our reduced cycle times, and we continue to see those. The construction cycle times have slowed in terms of reduction just because we're below our historical average pace of home construction. So with more labor means more competition. And so we've seen certainly a portion of those total stick and brick savings come through labor as well as some mix of materials. That specific amount or percentage or split, we don't have, but expect to see, with what we're seeing in the market, that we continue to see some stick and brick savings show up, especially into our third and our fourth quarter in our homes that we closed.

Okay. That's helpful. And I'm wondering if you could give any more kind of regional color on market strength and particularly what you're seeing in Texas and Florida, the spring season?

I think we're seeing good demand in Texas consistent as well in Florida. The markets feel pretty good to us. Generally, across the country, I would say that most of our markets are performing well in line with expectations, perhaps a little bit of softness in a few of our markets of kind of traditionally heavy exposure to the software industry, that buyer sentiment may be off a bit. Other than that, just kind of a good start to spring, pretty encouraged.

The next question will be from Trevor Allinson from Wolfe Research. Apologies, it looks like we just last Trevor. We'll come back to him if he comes back in. The next question will be from Michael Rehaut from JPMorgan.

I wanted to circle back to comments you made earlier about demand trends in March and April, and you kind of indicated that, I believe, March, in line with seasonality, and you're pleased so far with April. I was kind of curious if you could kind of go a little bit more into detail on that? Obviously, the consumer sentiment data has come out a little shaky since the start of Iran war, a lot of volatility, a lot of headlines. And just kind of curious what you're seeing more on a bottoms-up basis from your home buyers and week-to-week, if perhaps month as a whole might have been kind of consistent with seasonality, but if you saw any more volatility on a week-to-week basis?

We don't generally comment on intra-quarter in terms of monthly trends, but to reiterate what Mike said, demand was good throughout the quarter and in line with our expectations and normal seasonality. Normal seasonality would be that February into March and into April are really getting into the heart of the spring selling season. And we didn't see any meaningful impact or disruption to the business that we would tie to any global or gas-related price increases. And I've said earlier, but also our can rate was stable throughout the quarter, which is another positive.

Okay. I appreciate it. I guess, secondly, you highlighted gross margins being stable going to the third quarter, if you exclude the 40 bp benefit, also expecting to benefit from lower costs into the third quarter. Perhaps if I heard it right, more than the second quarter as some of those benefits compound, let's say, or you feel the full impact. With flat gross margin sequentially, you have better continued gains on the lower cost. Are there anything that's offsetting that, that otherwise, you wouldn't see a potentially slight sequential improvement? And I'm thinking, in particular, if perhaps there's still kind of some movement around incentives or higher land costs or any factors that might offset the otherwise benefit from lower construction costs?

We do continue to expect our lot cost to incrementally be a bit higher. It was relatively flat this quarter sequentially, but year-over-year, still up 4%. So that is a continuing headwind that -- our base case for this year was that we would see enough improvement in our stick and brick labor costs to offset that. And that's what we've seen thus far. That's kind of what we see as we look into Q3 right now. Obviously, incentive levels will depend on demand and mortgage rates and all the other factors that will impact our selling process. But -- so that remains to be seen what will happen on the incentive front.

And the next question will be from Trevor Allinson from Wolfe Research.

You mentioned earlier that your completed specs are down about 35% year-over-year. So made some real progress on working down inventory. In past quarters, you've talked about industry inventory levels kind of still being extended here. Have you seen the industry overall also start to make some progress on working down inventory? And then was that a factor either industry-wide or for you guys, specifically in your 2Q gross margin coming in better than you anticipated?

I think we have seen inventory levels reduce across the competitive environment and I think similar to what we have done, a little more control on starts and that being dependent on the sales pace and demand. And we have absolutely watched that closely week-to-week and managing our starts in line with our housing demand that we see and our expectations as we move from quarter-to-quarter. So we feel good -- very good about our inventory position and good about the starch level that we had as it related to our sales throughout the quarter.

Okay. Very helpful. And then second question on your lot count, it's down about 10% year-over-year. You've got land prices, which remain sticky demand, still challenged. Is it your expectation that lot count kind of still continues to move lower sequentially here as maybe fewer deals just meet your underwriting standards in the current environment? Or were you able to find enough deals here where you expect that lot count to kind of flatten out from where it's at now?

I think we feel really good about the current lot position we have, and we're probably as good as we've ever been in the company's history of positioned with our land pipeline, such that we're able to kind of pass on deals that don't make sense in today's current incentive environment and being disciplined in our approach to the underwriting.

I think our development partners continue to work with us as well to adjust lot takedown schedules. And so that's probably a big driver of the sequential decline in our owned lot count as we still have an immense need for finished lots and appreciate those relationships and the ability to flow our takes in the projects where we need to.

The next question will be from Rafe Jadrosich from Bank of America.

Just following up on the last comment. Can you talk about your exposure to land banking, maybe as a percentage of the option mix and then your ability to actually slow down the pace of the lot takedowns?

We have a mid-single-digit exposure to land lot bankers within our lot portfolio. So it's not a significant part of our land strategy at this point. Most of our lot position is held by third-party developers that are putting lots on the ground for us or Forestar. And we've been able to work with those folks in terms of adjusting, as Jessica said, take down schedules, timing of development phases to meet the market in line that makes sense for the market. We believe our strategy of working with third-party developers provides us a lot of operational flexibility, in addition to capital efficiency and utilizing the benefit of some very knowledgeable and seasoned experts in the development world.

Great. That's really helpful. And then I know it can be difficult to predict at times, but just can you help us at all with how we should think about the community count growth in the second half of the year? And if there's any sort of cadence that we should be considering?

We don't -- I always start with this. So we don't guide to community cap for a reason. It's a really hard one because it is so dependent on what's happening with our sales-based community by community. But it had stayed on a year-over-year basis, up a double-digit -- low double-digit percentage. We were up 11% year-over-year and 4% sequentially. We do continue to expect that to moderate at some point. I think the biggest positive this quarter, irrespective of community count, is that our sales were up 11%, in line with our community count increase. So we didn't see any decline on a year-over-year basis in terms of absorption. So another really positive sign about the second quarter and the demand environment.

We expect it will moderate for that mid-single digit. Exactly what that timing will be, whether it's in the next few quarters or it's next year, sometime, that's the part that's a little more difficult to predict.

The next question will be from Buck Horne from Raymond James.

Apologies if I missed this earlier, but I was just wondering if you could clarify for me, the changes to the top end of the revenue guidance for the year, given the -- I mean, the pretty resilient strength in net orders and the faster cycle times you're seeing, I just wanted to be clear on what the messaging was on kind of taking down the top end of revenue guidance for the year?

We lowered our closings guide by 500. And then we also saw a lighter ASP than we would have originally anticipated, and we're not really assuming our ASP to increase in the back half of the year. And so it's a combination of slightly lower closings at the high end and slightly lower average sales price.

And those lower closings would be driven by what factor?

We were light on our closing guide in both Q1 and Q2. We didn't achieve what we said we were going to do. We're still very well positioned to deliver in the heart of our original guide. We just felt like it was prudent to bring down the top end, since the first half of the year, we didn't deliver exactly what we were expecting.

Got it. Got it. Appreciate it. And just secondly, I was just curious if you're making any thoughts or changes around your land pipeline just due to what's changing around gas prices and just as consumers are having to drive longer distances for new home communities and the elevated cost of commuting, does that -- if we see an elevated energy price outlook longer term, do you start to reevaluate some of the locations where your communities are at in the pipeline?

We would have to see a very extended period of elevated gas prices to want to be responsive to that. The time that it takes to bring these communities online and our positioning of those communities are where we'd like to see them. So we feel good and comfortable about our community and our future community counts and locations. That said, we adjust as the market moves. And if we see an adjustment in market based on distances, then we'll adjust in kind, but nothing that we feel we need to be proactive about at this point in time.

The next question will be from Susan Maklari from Goldman Sachs.

My first question is on the SG&A. Can you just talk a bit more on how we should think about the path from here and your ability to get some leverage in the second half as those closings continue to come through?

So we do expect to see some leverage in Q3 and Q4 as our guide for closings is a step up. So we'll see a higher revenue volume in Q3, Q4. Obviously, we want to be as efficient as we can there. The decline in our ASP over the last few quarters and then specifically this quarter, obviously, is a little bit of a drag on the SG&A ratio as well. But we -- as we look forward, we do expect to see SG&A as a percentage of revenue coming down from where we've been in the last few quarters.

Okay. All right. That's helpful. And then how should we think about your ability or your willingness to continue on the shareholder return? Any thoughts there on potential upside or changes to the guide? And how you're thinking about balancing investments in growth relative to the dividend and the buyback in this environment?

Our approach will remain consistent there. We're focused on generating strong cash flows from operations. And then you're basically utilizing 90% to 100% of that cash flow for distributions to shareholders. We've been consistent with our dividend and inching that up each year, and then the remainder goes to share repurchases. We're still guiding to approximately $2.5 billion of share repurchases this year. We're ahead of pace through Q2, when we saw the pullback in the stock in the latter part of the March quarter. Obviously, we continue to purchase and leaned into it a bit. So we've really essentially accelerated a bit of our repurchases into Q2, but still right on track towards our $2.5 billion guide for the year.

The next question will be from Jade Rahmani from ABWK.

Could you talk about what's driving these warranty and litigation benefits, which you've experienced for more than this quarter and if you expect further benefits going forward?

Yes, Jade. The last 3 quarters, we've had various kind of one-off events that occurred. This quarter, we had a favorable outcome from a specific litigation case that had been previously reserved, and the results was better than what we had anticipated when we booked the reserve. And so that was a positive benefit this quarter. As well as we did see our warranty costs step down a bit, and we're seeing the benefits of that. We set our reserves based on really where our costs have been. So there was some benefit from that.

So this quarter, we would attribute 40 basis points of benefit from those items that we do truly believe are one-off. And so really, our forward anticipation is that the net impact of litigation and warranty would continue to be around 40 to 50 basis points negative impact on margin each quarter. This quarter, that impact was 0. We would expect normally it would be a negative impact of 40 bps.

And as a reminder, our supplemental presentation out on our Investor Relations site does give that line item detail on the home sales gross margin slide. And so you can see quarter-to-quarter what that is. And if you go further back than the last 3 quarters, you will see we're right in the heart of that 40 to 50 basis point typical impact.

And in terms of the share buybacks, is there a multiple at which above book value, you don't think it makes sense and where you would look to rather lean on the dividend as a way to efficiently return capital?

We look at all aspects of our distribution strategy, and valuation of where the stock is, is a component of that. However, we're committed to continuing to distribute the substantial majority of our cash flow to our shareholders. We've typically kept the dividend at a more consistent level because any payment of dividends, you prefer that to continue to increase over the long term, and we are very reluctant to reduce dividend levels. And so the share repurchase would be the element that would be more likely to either toggle up or toggle down over time.

The next question will be from Mike Dahl from RBC Capital Markets.

Nice results. I just wanted to ask a clarifying question on the incentives. I believe in the opening remarks, you made a comment about incentives continued to increase in the quarter. But then a lot of your subsequent commentary, it sounded like it was actually a little more stable. So I just wanted to kind of confirm, was that a comment that was sequential or year-on-year? And then I understand that on a forward basis, the market conditions will dictate where you go with that. But in terms of what's embedded in the 3Q guide, is that for stable sequential incentives or different level, good or bad?

I think you heard that properly as stable incentive levels from Q2 to Q3. In Q2, about 61% of our homes closed were sold within the quarter, so they're very reflective, the results were reflective of the market conditions we experienced, and that's what we're kind of projecting forward from an incentive level.

Okay. So the 10%, in the 10% you experienced in 2Q, was that also stable relative to -- so 1Q...

It ticked up slightly, but it was essentially rounded to the same number.

Got it. Yes, yes. Okay. That makes sense. I wanted to also follow up on the material cost dynamic. I appreciate that you guys have some forward visibility given the way you negotiate with your trades and labor. If we've now seen a slew of price increase announcements across a large basket of construction materials and building products and understanding that it may take time for those to go through, it may fluctuate based on ultimately what's happening on the ground today. But from a timing standpoint, if we start seeing price increases go into the market, this later this spring, when does that flow through to? Is that a fiscal '27 closings dynamic for you at this point in the year? Are you pretty locked for '26 starts and closings?

If we started to see those price increases truly come through, then yes, that would be more of an impact on fiscal '27. Certainly, we'd see some, but I think probably offset in balance, and we really haven't seen that to date. So we'll just see how that goes based on what occurs in the world.

Increases get announced a lot. That doesn't mean we actually take them.

The next question will be from Ken Zener from Seaport Research.

Given your normal order seasonality, do you feel -- did your teams tell you that you guys gained share? Or is that kind of just the demand environment?

Hard for us to gauge what we're doing on share versus the overall environment. It felt pretty good. Anecdotally, I'd say maybe it's a little bit of share, but I don't know. We'll find out when everybody else reports.

Over the next 1.5 weeks, I think you'll have a pretty good idea.

Yes. I mean our cash flow each other [indiscernible].

Right. No, it's very impressive. And then your lower land cost, I think you said it was up 4% year-over-year. Could you give us some context to that? I think it was more in the mid- to high single digits. And then can you talk to the benefit you believe you're realizing from when you slowed down starts to renegotiate? Just trying to understand how those 2 factors are -- might play out going forward.

When you talk about the benefit of slowing starts, are you talking on the land side or on the labor side? Labor? Yes, I think that...

It could be both. I mean really just to illuminate us, if you would.

Yes. I think that what we have seen and expect to see as we go into the third and fourth quarter, that the stick and brick savings between both materials and labor will offset any increase that we see on the land side. We have -- as we've gone through community by community, just like we do on the sales and our incentive level, this is a regular discussion with our development partners and/or landowners relative to the terms of any particular deal. And we've seen some savings on land deals, not widespread, but some land and lot reductions based on the reality of the environment and the pace at which we're buying lots and/or starting up.

And Ken, so the first part of your question, we did see moderation in terms of that increase on a year-over-year basis. We were up 6% last quarter, 4% this quarter. Too early for us to say it's going to continue to decline or stay right in that 4% range. But we have expected, as we continue to move through our earlier -- or our more recently purchased land that, that will moderate in terms of the year-over-year increase.

The next question will be from Jay McCanless from Citizens.

Jessica, I wanted to go back to a comment you made about a gross margin tailwind on homes that you guys sell earlier in the construction process. Is that some extra upgrades going in? Or is that just some cost attribution flowing through?

Some of that comes from choice selling earlier in the process compared to a completed home or one that we may be more motivated to move off balance sheet and get a buyer in there. So when we sell early in the process and there's a little more choice, whether that's lot selection or some of the things that go in the homes, I think those all attribute to a slight advantage on gross margin at the time of sale.

Yes. Just to clarify that we would expect a slightly higher margin on homes sold earlier in the construction process than those that are sold when they're complete, just to make sure we got the headwind tailwind on margin and cost of sales.

And we typically always talk to the point that once the home is completed and unsold for a period of time, we do start to see the margin degrade, which is why we have such a focus on not letting our completed specs age and how pleased we are with our completed spec reduction today.

Okay. That's great. The second question I had, I guess, along those lines, if you are able to sell a little bit earlier, I guess, how much were you able to raise prices in certain markets this quarter? Or is it still kind of tricky to pull that off?

It's certainly tricky to measure with any consistency because that is a community-by-community balance. In some cases, it's a reduction of incentives compared to a price increase, and trying to nail that down and put a number to it is just not something that we have.

The next question will come from Jonathan Bettenhausen from Truist Securities.

I know it's a smaller mix of sales, but another good quarter for the North. It's a fairly large region from a geographic perspective. So are there any metros specifically to call out that you're seeing outsized growth? Or is it more just kind of broad across the region there?

Pretty consistent across the regions. It's also reflective of investments we've made in that geography over the past several years that are now coming in and bearing fruit. So we're really pleased with the teams, how they're performing across the North region, and the contribution they're making to the overall sales results as Texas and Florida are not quite the powerhouses they once were.

Yes. Okay. And just to follow up on that. Can you talk about the kind of investment thesis in the North?

The investment thesis? It was markets we had not heavily penetrated. We saw opportunity to take national market share by expanding our presence in those markets, and we did it through a combination of greenfield organic growth as well as a few acquisitions.

The next question will be from Alex Rygiel from Texas Capital.

Cancellation rates have remained fairly stable, but have the reasons for the cancellations changed at all?

No. We continue to see that the vast majority of our cancellations are due to the buyer ultimately not being able to qualify for the mortgage once they get into the full documentation process.

And the next question will be from Alex Barron from Housing Research Center.

I was recently in San Antonio and saw you guys had several communities priced in the high 100s, low 200s. And I was wondering if that's just something you're only doing in that market? Or it's a new push you guys are doing across more markets to build more lower-priced affordable communities?

Alex, we have focused on finding a more affordable product and doing it where we can in the markets that especially allow the smaller lot prices and allow for those smaller square footages. Not something we can do across all municipalities in the country. We still face a lot of minimum lot size requirements that put the cost a lot out of range to achieve that and/or minimum square footages. But where we can achieve, we have seen good success with that. And certainly in Texas, allowing to get some of the lowest prices we can provide around the country where you're seeing in San Antonio, and we're seeing those across the Texas markets and feel good about the positioning.

Okay. And are you finding above average sales pace for that price point?

We are. It certainly opens up homeownership to places where there is no other option in a lot of the markets and certainly not for a new home with a warranty and stability of neighborhood and community that we're delivering. So it's absolutely opening up home ownership across the markets, and we see a higher pace because of that.

And that does conclude today's Q&A session. I will now hand the call back to Paul Romanowski for closing remarks.

Thank you, Paul. We appreciate everyone's time on the call today, and look forward to speaking with you again to share our third quarter results on Tuesday, July 21. And congratulations to the entire D.R. Horton team on a solid second quarter. We appreciate everything that you do.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, and welcome to the First 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.

Jessica, please go ahead.

Thank you. Sorry. It would help if I took myself off mute. Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the first quarter of fiscal 2026.

Before we get to 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, which is 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 & 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 had a solid start to fiscal 2026 with consolidated pretax income of $798 million on $6.9 billion of revenues, and a pretax profit margin of 11.6%. New home demand remains impacted by affordability constraints and cautious consumer sentiment. However, our teams continue to respond to current market conditions with discipline. We exceeded the high end of our revenue and closings guidance, achieved a home sales gross margin within our expected range, and our net sales orders increased 3% compared to the prior year quarter, demonstrating our ability to balance pace, price and [ incentives ] to drive incremental sales and maximize returns.

We are focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we have generated $3.6 billion of cash from operations, and we have returned $4.4 billion to shareholders through repurchases and dividends. For the trailing 12 months ended December 31, our homebuilding pretax return on inventory was 18.6%, while our consolidated returns on equity and assets were 13.7% and 9.4%. 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 produces sustainable results and positions us well for continued value creation.

We increased our sales incentives during the first quarter, and we expect incentives to remain elevated in fiscal 2026 with the level dependent on demand, changes in mortgage interest rates and overall market conditions. We work every day to use our industry-leading platform, unmatched scale, efficient operations and experienced employees to bring home ownership opportunities at affordable price points to more Americans. 64% of our mortgage company's closings this quarter were to first-time homebuyers. 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?

Earnings for the first quarter of fiscal 2026 were $2.03 per diluted share, compared to $2.61 per share in the prior year quarter. Net income for the quarter was $595 million on consolidated revenues of $6.9 billion. Our first quarter home sales revenues were $6.5 billion on 17,818 homes closed, compared to $7.1 billion on 19,059 homes closed in the prior year quarter. .

Our average closing price for the quarter was $365,500, flat sequentially and down 3% year-over-year. Our average sales price on homes closed is lower than the average sales price new homes in the United States by roughly $135,000 or almost 30%. Additionally, the median sales price of our homes is $70,000 lower than the median price of an existing home.

Bill?

For the first quarter, our net sales orders increased 3% from the prior year quarter to 18,300 homes, while order value remained unchanged at $6.7 million. Our cancellation rate for the quarter was 18%, consistent with the prior year quarter and down from 20% sequentially. Our average number of active selling communities was up 2% sequentially and up 12% year-over-year. The average price of net sales orders in the first quarter was $364,000, which was flat sequentially and down 2% from the prior year quarter.

Jessica?

Our gross profit margin on home sales revenues in the first quarter was 20.4%, up 40 basis points sequentially from the September quarter, entirely due to a recovery of prior-period warranty costs received during the quarter. On a per square foot basis, home sales revenues were flat sequentially, while stick-and-brick costs were down roughly 1% and lot costs increased 2%.

Excluding the 40 basis point benefit in our gross margin this quarter from the recovery of prior warranty costs, our home sales gross margin would have been 20%. Additionally, incentive increases moved throughout the quarter, so we expect our homes sold gross margin to be lower in the second quarter compared to the first quarter. Our incentive levels and home sales gross margin for the remainder of the year will be dependent on the strength of demand, changes in mortgage interest rates and other market conditions.

Bill?

Our first quarter homebuilding SG&A expenses decreased 1% from last year, and homebuilding SG&A expense as a percentage of revenues was 9.7%, up from 8.9% in the prior year quarter. The increase in our SG&A expense ratio was primarily due to our lower home closings volume as compared to the prior year quarter. We continue to manage our platform with discipline and are focused on gaining market share efficiently while driving operating leverage over time.

Paul?

We started 18,500 homes in the December quarter, up 27% sequentially from the fourth quarter, and we expect our starts in the second quarter to be higher than the first quarter. We ended the quarter with 30,400 homes in inventory, of which 20,000 were unsold. 7,300 of our unsold homes at quarter-end were completed, down 2,000 homes from September. 900 of our unsold homes have been completed for greater than 6 months.

For homes we closed in the first quarter, our median cycle time, measured from home start to home closed, decreased 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 will continue to manage our homes and inventory and starts pace based on market conditions.

Mike?

Our homebuilding lot position at December 31 consists of approximately 590,500 lots, of which 25% were owned and 75% were controlled through purchase contracts. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns and operational flexibility.

Of the homes we closed this quarter, 67% were in a lot developed by either Forestar or a third party, up from 65% in the prior year quarter.

Our first quarter homebuilding investment in lots, land and development totaled $2 billion, of which $1.3 billion was for finished lots, $610 million was for land development and $80 million was for land acquisition.

Paul?

In the first quarter, our rental operations generated $110 million of revenues from the sale of 397 single-family rental homes. Our rental property inventory at December 31 was $2.9 billion, which consisted of $2.5 billion of multifamily rental properties and $356 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations.

As for our financial services operations, pretax income for the first quarter was $58 million on $185 million of revenues, resulting in a pretax profit margin of 31.4%.

Mike?

Forestar, our majority-owned residential lot development company, reported revenues for the first quarter of $273 million on 1,944 lots sold, with pretax income of $21 million. Forestar's owned and controlled lot position at December 31 was 101,000 lots. 62% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $180 million of our finished lots purchased in the first quarter were 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 aggregate significant market share over the next several years.

Bill?

Our capital allocation strategy is disciplined and balanced to support an operating platform that produces attractive returns and substantial operating cash 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 the first 3 months of the year, homebuilding cash provided by operations was $498 million. Consolidated cash provided by operations was $854 million.

During the first quarter, we repurchased 4.4 million shares of common stock for $670 million, and our outstanding share count is down 9% from a year ago. We also paid cash dividends of $0.45 per share, totaling $132 million, and our Board has declared a quarterly dividend at the same level to be paid in February. At quarter-end, our stockholders' equity was $24 billion, down 4% from a year ago, and book value per share was $82.60, up 5% from a year ago. By December 31, we had $6.6 billion of consolidated liquidity, consisting of $2.5 billion of cash and $4.1 billion of available capacity on our credit facilities.

Debt at the end of the quarter totaled $5.5 billion, and we have $600 million of homebuilding senior notes maturing in the next 12 months. Our consolidated leverage at December 31 was 18.8% and we plan to maintain our leverage around 20% over the long term.

Jessica?

Looking forward to the second quarter, we currently expect to generate consolidated revenues in the range of $7.3 billion to $7.8 billion and homes closed by our homebuilding operations to be in the range of 19,700 to 20,200 homes. We expect our home sales gross margin for the second quarter to be in the range of 19% to 19.5% and our consolidated pretax profit margin to be in the range of 10.6% to 11.1%.

For the full year of fiscal 2026, we still 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 continue to forecast an income tax rate for fiscal 2026 of approximately 24.5%, 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 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 that support our ability to aggregate market share, generate substantial operating cash flows and return capital to shareholders.

We recognize the current volatility and uncertainty in the economy, and we'll continue to adjust to market conditions in a disciplined manner to enhance the long-term value of our company. 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 Instructions] And the first question today is coming from Stephen Kim from Evercore ISI.

Actually, quite impressive here given the headwinds. So congratulations to you guys. I wanted to ask you about your SG&A, if I could. I think that it was probably a little higher, my guess is, than you expected. And I was curious, you attributed the higher level primarily due to lower closings year-over-year, but your closings didn't miss your expectations or your guide. And so -- and actually, it beat. So I was kind of curious, did the SG&A sort of surprise you? And was there anything else other than the fact that you had some lower closings, just given the fact that it didn't really sort of square with your closings came in? And particularly within that, could you -- is there anything in the way of incentives or something that is showing up in SG&A?

Steve, nothing unusual in SG&A this quarter. Overall, relatively in line with our plan, and we hit our operating margin guidance for the quarter. If you look at the overall spend on SG&A, it was down slightly year-over-year in terms of absolute dollars. And as we look at our platform and we look at what we're planning to do this year, we're planning on growing our closings. Our guide is to grow our closings for the year. And so we're maintaining our platform in place.

But our first quarter closings were down. And just we get less leverage on our SG&A when we have fewer closings during the quarter. But our expectation is for the year is we would not continue to see this kind of increase as a percentage of revenues over the course of the entire year.

So just to clarify, you're saying your guide for the year is for SG&A to be kind of flattish on a year-over-year basis as a percentage of revenues, is that what you're saying?

We don't guide any of our margins or expense ratios over the course of an entire year. We just guide 1 quarter out. We're guiding our operating margin for Q2 and our gross margin for Q2 and then, obviously, our volume for the entire year.

Got you. Okay. And then I guess, you've also -- you've talked about your capital allocation and your -- sorry, specifically, you reiterated your guide for cash flow. And I was curious if you -- I think in the past, you had talked about cash flow -- targeting a cash flow conversion of about 100%. Can you talk about how that progression is going and whether or not that's still a reasonable expectation in the foreseeable future?

Yes, that's still a reasonable expectation. We're still guiding. We reiterated our guide to have cash flow -- consolidated cash flow greater than $3 billion. I think we're tracking right in line with expectations.

The next question will be from John Lovallo from UBS.

Pretty strong community count growth in the first quarter of about 12% year-over-year on average. How are you guys thinking about kind of the cadence of community count growth as we move through the year?

John, that community count is up. It was up 12% and 2%, I think, sequentially. And we still think we're going to see that community count continue to stay at a higher level, but we do expect it to drift down more towards mid-single to high single-digit range. We're pleased to have the community count out there today as we've seen absorption across the market, not seeing as much absorption per flag. So having mutual communities allows us to maintain our guide and still feel comfortable with where we're positioned today as we see the spring season unfold.

Understood. And then if we walk from the fourth quarter gross margin of 20%, excluding the inventory reserve or the warranty -- I'm sorry, the warranty reserve benefit, what are sort of the moving pieces there? I know, [ Jill ], you mentioned that incentives kind of stepped up as you moved through the quarter, but how are you thinking maybe about land, labor and materials on a sequential basis?

Sure. First, John, just as a reminder, in Q4, we also had an unusual item flowing through our warranty and litigation costs. We had 60 basis points of greater than typical litigation costs last quarter. This quarter we had the opposite direction, a 40 basis point benefit from those warranty costs. So kind of on an apples-to-apples basis, our fourth quarter gross margin was 20.6%. Our Q1 gross margin is 20.0%. And then our guide for the quarter is 19% to 19.5% in Q2. So at the midpoint, we're estimating to be down roughly 75 basis points quarter-over-quarter.

The guide really reflects what we've been seeing, which is our stick and brick cost relatively flat sequentially and slightly down year-over-year, which is what we really posted this year -- or this quarter as well. We expect our lot cost to continue to be up sequentially on a year-over-year basis based on what we currently see in our lot pipeline. And then as I did say on the call, we had to use a higher level of incentives as we moved throughout the quarter. So the guide really, most importantly, incorporates the most recent market conditions we've seen and our backlog margin coming out of the quarter at the end of December.

The next question will be from Matthew Bouley from Barclays.

I wanted to stick on the incentive topic. If I'm hearing you correctly, I mean, it sounds like that Q2 guide is reflecting of your increase in incentives over the past quarter in terms of what you're selling. So obviously, we've had this move lower in mortgage rates over the past several months, over the past couple of weeks, et cetera. I mean, does the move lower in rates at a certain point either support that kind of cost of incentives for you guys? Or are you able to kind of do anything creatively around ARMs or temporary buydowns, et cetera, in this backdrop? Just kind of any visibility to where you might see that incentive sort of peaking out at some point?

The cost of the incentives that came through in the first quarter were largely resulted from interest rate loss provided when rates were slightly higher, therefore, at a higher cost. We accelerated the use of those incentives throughout the quarter and the exiting incentive levels in December are heavily coloring our margin outlook for the second quarter. If rates continue to compress and stay compressed, we would expect to see a slight decrease in the cost of providing those incentives, but that's not yet factored into any of our guidance.

Okay. Perfect. And secondly, maybe just sticking on this topic of lower rates, I know we can't always read too much into the first 3 weeks of the calendar year, but just any color on sort of the cadence of demand, traffic and sales maybe through the quarter? And then since you have gotten this move lower in rates in recent weeks, is there just any kind of signals you can take from the past couple of weekends on how buyers are responding to that?

Matt, I would say through the quarter, relatively consistent with what we would expect to see seasonally entering into that quarter and being one of the lower quarters in terms of overall demand. As we enter into the spring and in the first 2 weeks, really too early to tell what we're going to see as far as trajectory into the spring. But when we see those kind of rates -- moves in rates and hovering right around 6%, it does spur some activity in our sales offices. And I think today, feel good about our position in terms of our inventory, our community count and the level of sales we've seen through the first quarter and into the first couple of weeks here of the second quarter to reaffirm our guidance for the year.

The next question will be from Alan Ratner from Zelman.

Obviously, there's a lot of focus on the policy side, and I'm sure we'll hear some more from President Trump this week on that front. But I guess, first off, in terms of what has been announced so far or at least floated out there, with specific regard to your rental business, I'm curious if you're thinking about that in the context of the proposed ban on institutional buyers purchasing single-family homes. I know you guys have been kind of reducing investment in rental in general. But how are you thinking about managing that business investment there, building out communities with the uncertainty hanging over that part of the business?

Alan, our focus on SFR rental has largely been and continues to be on purpose-built communities and believe that that's a good place for us to continue to stay focused. We don't sell many homes to institutional buyers in our for-sale communities. So for us, really not much competition for those people that are coming in to buy a home, looking for a home and whether it's first time, move-up or any one of our segments. We think we'll continue to stay focused there.

And with our SFR business has shifted more from a full build, lease and then sell a fully stabilized asset to more of a forward sales scenario. So feel really good about the position of our single-family rental business, and we'll see how all of this plays out over time, but I feel good about our position there.

Okay. I appreciate that. Obviously, we'll see whether there's any type of exclusion or carve-out for those purpose-built communities. I think, obviously, there's a good argument for that to be the case. But shifting gears a little bit in terms of the land market. I'm curious if you could talk a little bit about what you're seeing on the land front in terms of have costs started to come down at all in the land market? Are you seeing more of a bid-ask spread widening and kind of a slowdown in overall activity, development cost inflation? Any color you can give there, because, obviously, I think that's going to be a necessary component towards rebuilding the industry's gross margin, is to see some relief on land costs and development inflation.

I don't think we've seen significant capitulation in the land, the raw land market itself. I think the sellers there are really patient. We have seen probably some progress on some of the development cost aspects as activity levels have slowed. And further, we've seen some improved terms, not a tremendous amount of price discounts or any distress opportunities, but rational conversations with our land development partners about meeting the market together and working through communities at acceptable paces. So we've seen some adjustments in pacing, which has been very helpful. But we haven't seen any broad default of deals or new deals coming -- the deals coming back to the market over and over again with distressed sellers.

The next question will be from Ryan Gilbert from BTIG.

I just wanted to go back on the, I guess, the year-to-date demand trends. Paul, it sounded like you said that when rates get to around 6%, you see a pickup in the sales [ office]s. Has that been the case so far in January? Have you seen a pickup in homebuyer demand given the drop in rates?

We've been pleased with what we've seen so far. Again, it's early, very early in the spring selling season, and we'll see how that plays out over time, but feel good about our positioning. And any time you see the rates move across a threshold like that, it certainly creates more activity in our sales offices.

Okay. Got it. And then on the supply side, it looked like maybe there was a step down in industry-wide housing starts, and I think we're seeing some move lower in resell inventory as well. Are there any markets where you're seeing any benefit from less inventory coming online or maybe supply or home construction dropping that could potentially help margins going forward?

I don't think there's any specific markets I can speak to where we've seen any significant shift in supply. I do believe that it's been a pretty rational approach to the market in terms of starts for us and across the industry. We feel good about our inventory position. Our starts slightly exceeded our sales this quarter. We do expect our starts to be more in the second quarter than in our first. And what we watch closely is the number of completed homes that we have, and that is down a couple of thousand units sequentially this quarter over last.

So feel good about our positioning, the amount of supply we have in the market and have the homes we need to meet demand in the spring selling season.

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

I wondered if could just do a quick postmortem on the warranty cost piece of gross margin and that reversal you called out in the first quarter. First of all, were you expecting to get a reversal there? And then second, is there any warranty noise we should be contemplating in the second quarter guide? And then perhaps just want to talk to kind of what should we be thinking out for warranty costs within gross margins on a go-forward basis?

Sure, Sam. The warranty recovery was something we've been working on for a period of time to recoup some costs that we had to incur, that you'll see when we file our 10-Q were predominantly in our San Antonio market in the South Central region. So we were pleased to get that settlement in and be able to net against the warranty costs that we incurred during the quarter. We also did see just a slightly overall level -- slightly lower level of warranty and litigation costs incurred this quarter than our typical. And you layer that into also the litigation cost last quarter, and you see a big swing in the warranty and litigation cost line item and our gross margin supplemental detail that we provide that was actually a 20 basis point benefit. We would expect going forward that to be more normal.

And if you go and look at prior quarters outside of the last 2, let's call it, anywhere from 30 to 60 basis points that we net against our gross home sales gross margin for warranty and litigation costs. And we don't know of anything at this time that would make that be different in the go-forward quarters. The last 2 quarters have just been unusual in terms of what's happened.

That helps, Jessica. And then switching gears here. One of your big competitors is stepping up the use of ARMs. Can you just remind us your mix of ARMs and where that sits relative to last quarter and last year? And then if there is any change in your ARM cadence, any implications for financial services margins that we should be cognizant of?

Our use of ARMs is in the low single digit as a percent of homes financed through our mortgage company and -- although we've seen some more attractive ARM products that, for us, if they can be utilized for long-term approval, meaning that they're a longer-term ARM, then we've seen some. But it hasn't stepped up much. Still the incentive used most when we talk about rates is, for our buyers and through our mortgage companies, is a 30-year fixed rate.

Yes. So when Paul says low single digit on ARMs, that's just an absolute ARM product that is their product. If you look at the rate buydowns we're utilizing, we did see a tick up in temporary buydowns that we layered in on top of the permanent, that was more like a low double-digit percentage this quarter. But that's been running anywhere from a mid- to high single-digit percentage.

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

The comments you've made about affordability. I'm just curious, obviously, there's some hope for some external solution to affordability. But absent that, the steps that you're looking at to address affordability, what you're doing with incentives is having some effect, but are there any structural things you're evaluating or taking in regards to how [ size or how construct ] or location or even markets that you're considering related to this ongoing affordability issue?

Eric, we focus every day on meeting the homeowners where they need to be, especially on a monthly payment. And for us and in today's market, the reality of home pricing and cost of materials and cost of land is that we have seen continued introduction of smaller homes, whether that's a plan or 2 inside of an existing community or a whole community focused at more affordable price points. For us, the biggest limiter to some of that and creating more of that tends to be lot size and minimum lot size requirements at the municipal level where we can achieve that and get to a little higher density with more efficiency and provide a house that meets the monthly payment needs, especially of our first-time home buyers, we see success there.

And so we have focused on that across markets. And I wouldn't say there's any particular area where we're seeing that more, maybe other than those municipalities that are a little more flexible and allow us to go meet the market where it wants to be met.

Okay. And then secondly, if I could, the first-time market, first-time customer is about 2/3 of the business. I'm curious, is -- the other 1/3 of the business behaving similarly to that 2/3, to the first-time, or is there some difference in performance, price sensitivity, traffic volume, anything that's notably different?

I wouldn't say anything notably different. There's a lot of macro discussion going on, which I think impacts buyer sentiment in the market, and we've seen some consistency across that. Certainly, as you move up the price curve and there's less sensitivity to rates that move-up home buyer can move with a little more consistency when they want to and as they want to. But I would say, overall, I haven't seen a specific trend which shows a big separation of what's happening in our first-time home buyer market compared to our move-up.

The next question will be from Anthony Pettinari from Citigroup.

As you think about '26, do you expect to continue to outgrow the market? Or maybe could you be more in line with the market? Or are there regions where you're willing to let go a little share to maintain margin? And then just in terms of your spec count down year-over-year, is that just reflecting expectation for just kind of maybe a tougher spring season versus last year?

I think in terms of looking at our growth expectations relative to the market, we are expecting to grow this year. We have certainly positioned for growth with the increase in markets served over the past few years as well as significant increase in community counts being up 12% year-over-year. But we take that community by community and market by market, looking to maximize the returns there. And where we can aggregate market share profitably, we'll continue to do so, as we've done for the company's history. And the second part of your question?

Specs decline.

The spec decline is something that we've been focused on with compressing our building times and our cycle times. That way we'll be more efficient with the capital deployed in a given neighborhood and more responsive to more immediate buyer demands when they walk in. So the spec count reduction has been deliberate and purposeful. And it's not a limiter necessarily on our growth as it has been in the past because we can build homes faster than we ever have been able to.

Okay. That's very helpful. And then just following up on kind of the policy, we talked about, I think, a few proposals. But I'm just curious what policies do you think could be most helpful or impactful in terms of improving housing activity and getting more folks in homes in kind of a sustainable way?

Anthony, we're pleased that the administration acknowledges housing affordability is an issue and that there's a lot of focus on that from a lot of folks and think that it needs to be a focus. There's lots of different things that could be done on both the supply and the demand side. But ultimately, consumers are feeling good about where they are today, seeing the resale market open up, seeing availability at the local level, willingness for us to go drive more affordable housing into the market. All of those things, I think, would be helpful, and we'll see how all of this plays out over time.

And we're already doing more to address affordability, I'd say, than any other builder out there. And we'll see what ultimately comes out of the policy, but we believe we're the best-positioned builder to take advantage of if there is any sort of demand pickup out there, particularly for the first-time homebuyer.

The next question will be from Michael Rehaut from JPMorgan.

First, I wanted to focus on there's recent tweets, I guess, or comments made by the FHFA director directly speaking to share repurchases by large homebuilders in contrast to putting out more volume into the market. So I want your thoughts on that. Obviously, today you reiterated your outlook for [indiscernible] share repurchases for the year. I'm curious if you've had any direct conversations with the FHFA regarding this. Because obviously, you guys are mandated by all public companies, you have an obligation to our shareholders, first and foremost. And so I'm just curious if there's been any discussion with the FHFA, and your thoughts on those recent comments.

Michael, we have maintained our balanced approach, and you look at our starts pace this quarter sequentially, up 27%, as Jessica intimated, providing affordable housing to more Americans today. I think 64% of the homes financed through our mortgage company were first-time homebuyers in closings this quarter. We feel very good about our position to continue to meet that demand and provide the housing that we need out there. No direct conversations for us around buybacks and feel like a balanced approach. And that's why we reiterated what we plan to do on our guidance for the year. We feel like we're in a great position to continue to provide the housing that we need to with the cash flow that we're generating to both invest in our operations and our business and to provide returns and return money to our shareholders.

Okay. All right. Appreciate that. I guess secondly, you kind of highlighted earlier in the call that your incentives went up during the first quarter, and that appears to be the primary driver of the sequential decline in gross margins in the second quarter, among other factors, I guess. I wanted to get a sense, as a percent of sales, where incentives [ ended in ] the first quarter versus the beginning of the first quarter. And if that shift occurred towards the end of the quarter, or was it kind of ratable throughout?

Yes. Mike, the increase in incentives was really ratable throughout the quarter, sequentially increased throughout the quarter. And so we exited the quarter at a higher level of incentives and a lower gross margin on our closings in December than for the overall quarter. And so that's really the level that we carry into Q2. And so that's a big part of the driver of our guide for our Q2 margin.

And pleased that incentives are still having the desired impact, right? Our sales were up 3% year-over-year as a result of those efforts.

And can you just remind us what percent of sales incentives were by the end of the quarter versus the beginning of the quarter?

We've been running a high single-digit percentage. Today we might have ticked up to low double digits.

The next question will be from Trevor Allinson from Wolfe Research.

A follow-up question on your view on current new home inventory levels in your markets. I appreciate it varies market by market. But if we were to focus on some of the more important geographies in Florida, Texas and some of the other more important markets, is there still excess inventory relative to demand, or has the slowdown in starts we've seen across the industry here in the fourth quarter, brought that more into equilibrium?

I would say we still see pockets of elevated inventory, and that is market to market. I don't think we're here today to call out anything with specificity as to where we're significantly overweighted in inventory. But certainly, market by market and submarkets inside of larger MSAs, and there are subdivisions and communities out there where demand hasn't caught up with the amount of supply that's in the market, but we see that continue to rightsize across our footprint.

Okay. Paul, that's very helpful. And then second, obviously, there's been a lot of activity on the policy side here. There's an expectation for a lot of activity. Rates have come down here. If those are successful in driving better demand this spring, how do you guys think about your preference to do more volume versus the 86,000, 88,000 closings target you have currently versus recapturing some margin as incentives still remain really elevated?

Trevor, we're going to take a look at that community by community. And as always, we're going to look to focus on driving the best return out of that given community based upon competitive dynamics at that submarket level, replacement lot supply and what our demand trends are there. And where there is opportunity for margin expansion, we'll take it. Where it makes more sense to drive more pace, we'll do that as well. Looking for a balanced approach, no different than what we've been doing. It's just responding to the current market conditions in place in front of us, sales office by sales office.

The next question will be from Rafe Jadrosich from Bank of America.

As we head into spring selling, can you compare the market today versus, say, a year ago in terms of the demand and inventory that's out there? .

I don't know that there's a direct parallel to be drawn. We are encouraged by the fact that we've still got people out there looking to buy a home. There's certainly not a lack of interest. I think it's breaking through the consumer confidence and seeing people feel good about their decision to move forward. We are encouraged by the traffic we see out there today.

I do believe that if you look at today over last year at this time, there's a little more balance of inventory. Certainly, we see that across our communities, and think you see that across the industry. So set up -- we believe we are in good position as we move into the spring selling season. Comfortable with where we're positioned with our communities, our community count, our inventory and, most importantly, our people in the field, taking care of buyers as they come into our models.

And then on the stick and brick side, I think you said that in the fiscal first quarter, stick and brick costs were down 1% quarter-over-quarter, and I think you're guiding for it to be flattish quarter-over-quarter in the second quarter. Is it flattening out now? Or is there still opportunity to take more cost out? Where are you in the process of sort of clawing back some margin from either the trades or building product or distributors?

We believe there's still opportunity there. And our reduction in starts was intentional to give us the opportunity to meet with our trades or vendors or suppliers and look at the reality of the market in front of us. So although our guide is too flat and not seeing significant reduction in stick and brick, part of that too is a percent of -- or it's based on a square foot basis, which is a little harder sometimes to measure based on mix and product and sizing. But we certainly feel like there's opportunity to continue to see some reductions in the cost of homes that we're putting around.

The next question will be from Susan Maklari from Goldman Sachs.

My first question is, thinking about the conditions that you've talked to and your ability to continue to hold on to that improvement that you've seen in cycle times and the efforts that you're realizing with your suppliers, if we do see somewhat of a lift in demand as we go through this year. Do you think you can continue to maintain that flexibility that you've realized?

We've had long relationships with these trade partners. The last time we had a really significant production disruption was partially labor, largely was due to material shortages. That is something we do not expect at all this time at all. Materials are in great shape, product is available. And the relationships we've had with labor trades in several markets going back 30, 40 years, consistently paying the bills on time, consistent starts cadence and the consistency of product deployed has been really helpful in maintaining our partnership with those trade bases.

Okay. And then maybe turning to the growth side of things. Can you talk about what you're seeing in terms of some of the smaller privates, how they're feeling today, your ability to perhaps leverage further M&A as an element of growth that you're looking to achieve?

We continue to look at opportunities that are in the market. And I think that our focus has been more on the tuck-in opportunities to either expand our capacity in a particular market and/or an entry into a market. But we continue to evaluate those as they come towards us. And I think if you see anything in the future, it will be similar to what you've seen over the last several years with the smaller builders that give us a solid platform and are a good fit to us in markets.

The next question will be from Ken Zener from Seaport Research.

Paul, with orders up 3%, there's a community count effect there, but a lot of [ details ] today, but my basic question is this. Demand is there. You need to offer some incentives, but demand is there amid very low job growth. For example, Dallas, you're familiar with, job growth is around 30,000 year-over-year, it's well less than half the long-term rate, yet you're still seeing demand. Can you talk to like where that demand is coming from amid such low job growth that we're seeing, it's not just Dallas, it's in many different markets, yet you guys are still seeing activity? Is that -- do we really need job growth to normalize, to get your margins in a more stable upward slope?

I think job growth is always going to be key to overall household formation and the demand side of our business. There's no question there. I do believe that we are seeing, continue to see some pent-up demand. And as people grow, and especially for our buyers, for the first-time home buyer, that have delayed that home purchase decision and making the decision today to come out of an apartment and/or out of their parents' home, it makes it a little less reliant on seeing just pure job growth to create household formation in some of MSAs that we operate in.

So I do think it's a balance. I think, long term, we absolutely need to see job growth and continued job growth if we want to see growth in overall housing demand.

Right. And can you kind of comment that -- I mean it's AI and many different things today, the 10-year is up 5 or 6 basis points again. But do you feel like we're really [ plowing ] forward just from that quote pent-up demand that didn't occur? Because it's quite odd that we're seeing demand so strong when the job growth has been so weak. And it begs the question of, right, what if it stays weak, do you pull -- have you tapped essentially your demand that was there not tied to job growth? I'm just trying to figure it out because -- do you know what -- what do your people say when you don't have really good job growth yet housing demand is there?

Well, I think it's why we continue to prefer our focus on the entry-level and first-time buyer because they're a need-based buyer. Everyone needs a place to live. And so if we can strike that right affordability balance, they might need a little bit of help in terms of [ gift ] funds from parents or relatives. We continue to see just shy of 20% of our buyers utilizing our mortgage company are utilizing gift funds to make that purchase. But the lower the price point we can put houses on the ground at, the more buyers that are out there. Because once again, a first-time buyer needs a place to live. If we can be competitive with [ rent ], they're still interested in that home purchase.

The next question will be from Jade Rahmani from KBW.

If rates do move lower, do you think homebuilders will choose to pass along that saving to buyers rather than take margins in the hopes that that would stimulate demand further?

I think we continue to see a balance to meet the consumer where they are relative to the rate environment. And it would be a -- can you spur additional demand and drive more pace, more units, if that's going to be the most incrementally positive lever we can pull on returns, and we would go in that direction. If it's a community where there's more scarcity of supply, it might result in an improvement in margins.

Even with our increased incentives though in the December quarter, we kept our lowest 30-year fixed-rate offering at 3.99%. And so we would have the ability, to Mike's point, we'd always choose to go lower if rates move lower and it could cost us the same, or if demand is just picking up and we don't need to move lower on that rate offering, we won't. But we did in the December quarter stay with 3.99% as the lowest 30-year fixed rate buydown we were offering.

And with 64% first-time homebuyer in your mortgage company, could you give any color as to whether you think an allowance of 401(k) savings to be used for deposit down-payment would move the needle at all? Could that be material? Or do you think it's unlikely to be so?

I think anything that opens up the ability of people to either get to a monthly payment and/or get to down-payment, which are the 2 things, especially for a first-time homebuyer, that we need to solve for, right, it's getting to a monthly payment that they're comfortable with, can and should afford, as well as the down payment that they need to purchase a home. So we absolutely think it will be helpful. To what level, we'll see what gets put forward in terms of policy and how that plays out. But anything that we see to help get people moving, not just new home market but in the resale market as well, we believe is accretive to our performance.

And the next question will be from Alex Barrón from Housing Research Center.

I just wanted to confirm the volume guide you guys are giving. Is that just for the wholly owned communities? Or does that also include the homes you guys are doing in rental communities?

Sure, Alex. Our home closings guide for the year is for -- by our homebuilding operations, so it does not include single-family rental, but our revenue guide for the full year is consolidated revenues. So would anticipate our rental revenue included in that. .

Got it. And I wanted to ask on the margin guidance. Was that mainly driven by offering higher incentives in the way of rate buydowns or more like in the way of price cuts?

Mostly incentives based on buydowns and based on the level of buydowns and incentive costs we were seeing as we exited Q1 really driving the Q2 levels.

Okay. And if I could ask one last one. Are you guys starting to feel any impact from tariffs and materials costs?

No. We still haven't taken any significant or noticeable increase in a material due to a tariff.

Thank you. This does conclude today's Q&A session. I will now hand the call back to Paul Romanowski for closing remarks.

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our second quarter results on Tuesday, April 21. Congratulations to the entire D.R. Horton family on achieving a solid first quarter. We are honored to represent you on this call and greatly appreciate all that you do.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, and welcome to the Fourth Quarter 2025 Earnings Conference Call for D.R. Horton, America's Builder. [Operator Instructions] I will now turn 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 fourth quarter and fiscal 2025 financial results.

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 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.

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 work 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 continue 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 pretax income of $1.2 billion on revenues of $9.7 billion, with a pretax profit margin of 12.4%. For the year, our consolidated pretax income was $4.7 billion with a pretax profit margin of 13.8%.

Our homebuilding pretax 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%, and compared to the S&P 500's compounded annual return of 13.3%. Also, our return on assets ranked 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 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 time frame, we grew consolidated revenues and 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?

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 and 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?

Our net sales orders in the fourth quarter increased 5% from the prior year quarter to 2,078 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?

Our gross profit margin on home sales revenue 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.

On a per square foot basis, home sales revenues were down roughly 1% sequentially, while sticks and bricks 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?

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?

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 30 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 and inventory and [ starch pace ] based on market conditions. Mike?

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 owned lots are finished and the majority of our option 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 relationships 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.

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 million. Paul?

In the fourth quarter, our rental operations generated $81 million of pretax income on $805 million of revenues from the sale of 1,565 single-family rental homes and 1,815 multifamily rental units. For the full year, our rental operations generated $170 million of pretax income on $1.6 billion of revenues from the sale of 3,460 single-family rental homes and 2,947 multifamily rental units.

Our rental property inventory at September 30 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?

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 pretax income of $113 million.

For the full year, Forestar delivered 14,240 lots, generating $1.7 billion of revenues and $219 million of pretax income. 62% of Forestar's owned lots are under contract with are 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?

Financial services earned $76 million of pretax income in the fourth quarter on $218 million of revenues with a pretax profit margin of 34.7%. For the year, financial services earned $279 million of pretax income on $841 million of revenues with a pretax 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?

Our capital allocation strategy is disciplined and balanced to support an expanded operating platform that produces attractive returns and substantial operating cash 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 stockholders' 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 30, 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% an 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?

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 31, 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 pretax 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?

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 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 Instructions].

The first question today is coming from John Lovallo from UBS.

The first one is when we think about the walk from the 20% gross margin in the fourth quarter to the $20 million to $20.5 million 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?

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 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 guidance.

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?

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 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 starch 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 on.

The next question will be from Stephen Kim from Evercore ISI.

I guess my -- looking at your guide on 1Q, it -- the gross margin, I think you've explained it pretty well here. But the consolidated pretax 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?

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.

That's very helpful. I appreciate that. 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?

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.

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

Quick follow-ups on the gross margin. I 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.

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.

We had to increase a few of those. And so that drove the change in the quarter. Those are elements that 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 in our home closings to continue to increase incrementally. And we're certainly going to be striving to offset that as best we can with the stick and brick savings as we move into the year.

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 break out the difference between step-up in price discounting versus rate buydowns? And then I know you do buy down to some very below market rates in certain communities units as low as 3.99%. Just curious whether the proliferation of those significantly below market buydowns stepped up in Q4?

Yes, Sam. So as we anticipated on our last call, we did expect to lean in more heavily to the offering of [ $399]. 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 buy-down overall. So that accounted for about 73% of our total closings in Q4, which was up from 72% sequentially.

The next question will be from Alan Ratner from Zelman & Associates.

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 kind of the start pace way down. Just curious if you 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 coming down?

Or was there perhaps a little bit of a shift in incentive strategy? I know the 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.

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 on to 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 in those homes, we're going to sell and close in September.

And we have a few more in the backlog that will be closing out as well. But we moderated the start space to reflect a sales environment, as Paul says, to rightsize 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.

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.

Got it. Okay. That makes a lot of sense. And then second question, just looking at your closing guide for '26, 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 '26 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 will 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, a still solid economy that you feel a little bit more positive about the demand outlook heading into this year's spring versus last.

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 a position to deliver on our guide and feel good about our positioning today. Even with our inventory, total housing inventory at a lower number. That's been purposeful because we believe we have the ability to deliver the units in a time of fashion.

And the next question will be from Matthew Bouley from Barclays.

I have, I guess, a similar question to what Alan just asked, but I want to add a little more to it around the gross margin side. And so obviously, guiding to growth in the 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?

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 year. So 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 can't -- cannot continue to run the machine to a 0 profit margin. That makes $0 whatsoever.

Yes. Got it. Okay. Understood. And then maybe just zooming into the lot costs. So I guess it sounded like there was still a little bit of inflation sequentially. I'm just curious at kind of the very front end, whether it's development costs or kind of renegotiating with your land counterparties, et cetera. Is there an outlook to either flattening or eventually improving lot costs? And when may that begin to benefit you guys?

I think, Matt, given the mix of our overall lot portfolio in 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 and 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 in the number of lots that we own based on market conditions.

And I think an even better opportunity that we look at in '26 is renegotiating our stick and brick cost, lot costs continue to be sticky, and we're doing everything we can on that front, but we would expect our stick and brick costs to come down as we move throughout the year.

And the next question is coming from Rafe Jadrosich from Bank of America.

I just wanted to ask on the second half, the delivery outlook, it seems like it's more second half weighted. Can you talk about like the start pace and community account that you're assuming, how do we think about the cadence of that through the year?

I think overall, our starch space 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.

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 digits. But right now, as we go into the year, we are up double digits. So that positions us well to not have to plan for higher absorptions in order to achieve our volume and our business plan.

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?

Yes. I think we were up 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 closing 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.

The next question will be from Trevor Allinson from Wolfe Research.

First question is on demand in Texas. We've heard a couple of builders call out Texas 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 the 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 of your commentary from the [indiscernible].

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.

Okay. And then second question, you talked about getting your inventory lower in the quarter. You're also now talking to about increasing your start pace here. So perhaps suggest 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 early -- late in 2025 and early in 2026?

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 slowing starts also gives us the opportunity to work on repricing some of our stick and brick costs and the ability for us to sell houses and [ star ] houses and increase our start pace is predicated upon the sales environment and the ability to reduce our vertical construction costs, 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.

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.

The next question will be from Anthony Pettinari from Citi.

Your repurchase guide $2.5 billion, I think, is kind of significantly below what you'll probably end up doing in '25, 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 '26 in terms of step-up in land purchase development? Or any other thoughts there?

Yes. We repurchased $4.3 billion in fiscal '25, the guide of $2.5 million is lower, it's all governed by our cash flow. This year, we have said several times in fiscal '25, 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 '25 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 and our share repurchase as well. So we had some unique opportunities in fiscal '25 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 a 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 distributed 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.

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 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?

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 Southeast 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.

The next question will be from Michael Rehaut from JPMorgan.

The 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, if from here on in, so from the 20% to 25% 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?

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 have certainly seen our vendors interested in the starch pace increasing as are we. I mean that's good for the industry, and they recognize that.

We'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 note 12 months.

And what was -- what were construction costs on a year-over-year basis for the fourth quarter?

We were down year-over-year and flat sequentially. And for the full year, we were down about 1.5.

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 2 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?

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 really is choppy.

I mean -- and there's a lot of headlines and noise and we would have expected to see a little bigger bump the reduction in mortgage rates that we've seen, and we've seen them come down a little more here recently. And I hope that, that turns into more people getting off the fence and into the buy box. But we do see interest in our sales offices, and we do see people out there looking for homeownership.

The next question will be from Ken Zener from Seaport Research Partners.

I wanted to step back if we could, just to -- 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 2/3 year lots being bought finished [ A]? And also, -- can you talk to a lot of the homebuilders described 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?

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 and in those markets, that is going to have an impact on go-forward demand. 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.

And the 20% question?

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 2 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. 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 pretax profit margins.

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. Are we in -- at the -- does 120 bps increase now bring us into low double digits in terms of incentives?

No, it was a 110 basis point sequential increase and we're still a high single-digit percentage overall.

And no specificity, I take it, correct?

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 outside litigation costs, we also did in our supplemental presentation, break out external broker commissions now. So you'll see if the 110, 10 basis points was related to increased broker commissions, which is to be expected when we're trying to drive incremental sales.

The next question will be from Susan Maklari from Goldman Sachs.

This is [ Charles Perron ] in for Susan. 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 the market next year?

Yes. I think we have seen -- when we just kind of look at the beginning expectation or budget for some of those divisions at 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.

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 '25? I guess, first, is this a fair assumption? And more broadly, how do you expect the ASP to trend in 2026, should market conditions persist? And how much of that would be driven by like-for-like pricing versus mix relative impact?

Yes. 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.

The next question will be from Mike Dahl from RBC.

I had another follow-up on 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 start base consistent with what 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?

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 we just -- 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.

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 ] from the growth, maybe give us a broader view on how you're seeing the kind of the M&A and bolt-on and for yourselves?

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, but 2/3 of them are sold.

And then we got control another 1,300 lots in good 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 loans 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.

And if anyone's not familiar, that was an October transaction that didn't happen during the quarter, so it was subsequent to year-end.

The next question will be from Jade Rahmani from KBW.

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?

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 it allows people to move forward with a purchase is what we will continue to do. In the 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 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 BSC, we'll take advantage of some of that. So I would expect it to be a balance as we look forward.

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 buy-downs?

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 -- 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 range.

The next question will be from Jay McCanless from Wedbush.

So I just wanted to follow up on your comments. I think it was 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?

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 needed -- that we needed to generate the volume and generate our returns.

For fiscal '25 was -- 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 as we can, but we are starting Q1 at a lower entry point than we did when we entered Q4.

Got it. Okay. And then I can't remember who made the comment about this, but about lower rates seeming 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.

In some cases, it's -- they want to buy the homes qualification issue for what payments they can afford. As Paul said, we're solving back for a payment and when 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, well maybe I should wait for them to drop. Maybe I should 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 then will be looking for different housing options other places. And we see a lot of people with house to sell contingencies that come in that want to buy a house, but they can't get their household.

And the next question will be from Alex Rygiel from Texas Capital.

What percentage of your buyers are using adjustable rate mortgages. And how has that changed over the last 12 months?

Sure. It's come from essentially 0 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 buy down. I do think our base case would be that percentage continues to drift up, but it won't move sharply.

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?

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 starts coming, it will be on the smaller end in the community, but we'll respond to the market as it comes. So 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.

Thank you. This does conclude today's Q&A. I will now hand the call back to Paul Romanowski for closing remarks.

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 20. 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.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, and welcome to the Third Quarter 2025 Earnings Conference Call for D.R. Horton, America's builder. [Operator Instructions]

I would now like to turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Matthew, and good morning. Welcome to our call to discuss our financial results for the third quarter of fiscal 2025. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Form 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 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 post updated investor and supplementary data presentations 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'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. .

The D.R. Horton team exceeded our expectations and delivered solid results for the third quarter, highlighted by earnings of $3.36 per diluted share. Our consolidated pretax income was $1.4 billion on $9.2 billion of revenues with a pretax profit margin of 14.7%. Our net sales orders in the third quarter were flat with the prior year quarter and increased 3% sequentially. Our tenured operators continue to respond to market conditions with discipline balancing pace versus price to maximize returns in each of our communities, achieving 23,160 homes closed this quarter with a home sales gross margin of 21.8%, both of which were above our guidance range.

We remain focused on maximizing capital efficiency to generate substantial operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we have generated $2.9 billion of cash from operations, and we have returned $4.6 billion to shareholders through repurchases and dividends. For the trailing 12 months ended June 30, our homebuilding pretax return on inventory was 22.1%, while our consolidated returns on equity and assets were 16.1% and 11.1%.

Our return on assets ranks in the top 15% of all S&P 500 companies for the past 3-, 5- and 10-year periods, demonstrating that our disciplined, returns-focused operating model produces sustainable results and positions us well for continued value creation.

New home demand continues to be impacted by ongoing affordability constraints and cautious consumer sentiment. Where necessary, we have increased incentives to drive traffic and incremental sales. Our cancellation rate remains at the low end of our historical range, indicating that buyers in today's market are able to qualify financially and are committed to their home purchase despite the volatility and uncertainty of the current economic environment.

We expect our sales incentives to remain elevated and increased further during the fourth quarter, the extent to which will depend on the strength of demand, changes in mortgage interest rates and other market conditions. With 54% of our third quarter closings also sold in the same quarter, our sales, incentive levels and gross margin are generally representative of current market conditions. We will continue to tailor our product offerings, utilize sales incentives and adjust the number of homes and inventory based on demand in each of our markets. We are well positioned, offering our customers an attractive value proposition with quality homes at affordable price points, and we have a positive outlook for the housing market over the medium to long term.

Mike?

Earnings for the third quarter of fiscal 2025 were $3.36 per diluted share compared to $4.10 per share in the prior year quarter. Net income for the quarter was $1 billion on consolidated revenues of $9.2 billion. Our third quarter home sales revenues were $8.6 billion on 23,160 homes closed compared to $9.2 billion on 24,155 homes closed in the prior year quarter. Our average closing price for the quarter was $369,600, down 1% sequentially and down 3% year-over-year.

Bill?

For the third quarter, our net sales orders of 23,071 homes were flat with the prior year quarter, while order value decreased 3% to $8.4 billion. Our cancellation rate for the quarter was 17%, up from 16% sequentially and down from 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 12% year-over-year. The average price of net sales orders in the third quarter was $365,100, which was down 2% sequentially and down 4% from the prior year quarter.

Jessica?

Our gross profit margin on home sales revenues in the third quarter was 21.8%, which was flat sequentially and above our expectations. Although our home sales gross margin was stable from the second to third quarter, our incentive costs have increased on recent sales, so we expect our home sales gross margin to be lower in the fourth quarter compared to the third quarter. Our actual incentive levels and home sales gross margin for the fourth quarter will be dependent on the strength of demand, changes in mortgage interest rates and other market conditions.

Bill?

In the third quarter, our homebuilding SG&A expenses increased 2% from last year, and homebuilding SG&A expense as a percentage of revenues was 7.8%, up 70 basis points from the same quarter in the prior year. Our community count is up 12%, and our market cap has increased 4% to 126 markets in 36 states. The investments we have made in our team and platform position us to continue producing strong returns, cash flow and market share gains, while remaining focused on managing our SG&A costs efficiently across our operations.

Paul?

We started 24,700 homes in the June quarter, up 24% sequentially from the second quarter, and we expect our starts in the fourth quarter to be lower than the third quarter. We ended the quarter with 38,400 homes inventory, of which 25,000 were unsold. 7,300 of our unsold homes at quarter end were completed, down 1,100 homes from March. 800 of our unsold homes have been completed for greater than 6 months. For homes we closed in the third quarter, our construction cycle times improved several days from the second quarter and approximately 2 weeks from a year ago. Our improved cycle times position us to turn our housing inventory faster, and we will continue to manage our homes and inventory and start pace based on market conditions.

Mike?

Our homebuilding lock position at June 30 consisted of approximately 600,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. We are actively managing our investments in lots, land and development based on current market conditions. During the quarter, our homebuilding segment incurred $16 million of inventory impairments and wrote off $36 million of option deposits and due diligence costs related to land and lot purchase contracts.

We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns and operational flexibility. Of the homes we closed this quarter, 66% were in a lot developed by either Forestar or a third party, up from 64% in the prior year quarter. Our third quarter homebuilding investments in lots, land and development totaled $2.2 billion, of which $1.4 billion was for finished lots, $610 million was for land development and $140 million was for land acquisition.

Paul?

In the third quarter, our rental operations generated $55 million of pretax income on $381 million of revenues from the sale of 1,065 single-family rental homes and 328 multifamily rental units. Our rental property inventory at June 30 was $3.1 billion, which consisted of $2.5 billion of multifamily rental properties and $668 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations.

Jessica?

Forestar, our majority-owned residential lot development company, reported revenues for the third quarter of $391 million on 3,605 lots sold with pretax income of $44 million. Forestar's owned and controlled lot position at June 30 was 102,000 lots. 63% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $320 million of our finished lots purchased in the third quarter were from Forestar. .

Forestar had $790 million of liquidity at quarter end with a net debt-to-capital ratio of 28.9%. Our strategic relationship with Forestar is a vital component of our returns-focused business model. Forestar's strong, separately capitalized balance sheet, substantial operating platform and lot supply position them well to consistently provide a central finished lots to the homebuilding industry and aggregate significant market share. Mike?

Financial services pretax income for the third quarter was $81 million on $228 million of revenues, resulting in a pretax profit margin of 35.7%. During the third quarter, our mortgage company handled the financing for 81% of our homebuyers. Borrowers originating loans with DHI mortgage this quarter had an average FICO score of 720 and an average loan-to-value ratio of 90%. First time homebuyers represented 64% of the closings handled by a mortgage company this quarter. Bill?

Our capital allocation strategy is disciplined and balanced to support an operating platform that produces compelling returns and substantial operating cash 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 the first 9 months of the year, homebuilding cash provided by operations was $1.7 billion, and consolidated cash provided by operations was $950 million. .

At June 30, we had $5.5 billion of consolidated liquidity, consisting of $2.6 billion of cash and $2.9 billion of available capacity on our credit facilities. In May, we issued $500 million of homebuilding senior notes due 2030. And in June, we increased the capacity of our homebuilding revolving credit facility to $2.3 billion. Debt at the end of the quarter totaled $7.2 billion with $500 million of homebuilding senior notes maturing in the next 12 months.

Our consolidated leverage at June 30 was 23.2%, and we plan to maintain our leverage around 20% over the long term. At June 30, our stockholders' equity was $24.1 billion, and book value per share was $80.46, up 7% from a year ago. For the trailing 12 months ended June 30, our return on equity was 16.1% and our return on assets was 11.1%.

During the quarter, we paid cash dividends of $0.40 per share totaling $122 million, and our Board has declared a quarterly dividend at the same level to be paid in August. We repurchased 9.7 million shares of common stock during the quarter for $1.2 billion, and our fiscal year-to-date stock repurchases were $3.6 billion, which reduced our outstanding share count by 9% from a year ago. Our remaining share repurchase authorization at June 30 was $4 billion. Jessica?

Looking forward to the fourth quarter, we currently expect to generate consolidated revenues in the range of $9.1 billion to $9.6 billion and homes closed by our homebuilding operations to be in the range of 23,500 to 24,000 homes. We expect our home sales gross margin for the fourth quarter to be in the range of 21% to 21.5% and our consolidated pretax profit margin to be in the range of 13.6% to 14.1%.

For the full year of fiscal 2025, we now expect to generate consolidated revenues of approximately $33.7 billion to $34.2 billion, and home closed for our homebuilding operations to be in the range of 85,000 to 85,500 homes. We still forecast an income tax rate for fiscal 2025 of approximately 24%. Based on our fiscal year-to-date share repurchases, strong financial position and expected operating cash flows of greater than $3 billion, we now plan to repurchase $4.2 billion to $4.4 billion of our common stock in fiscal 2025, subject to the amount of cash flow generated and share price changes during the fourth quarter. Paul?

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 that support our ability to generate substantial operating cash flows and return capital to shareholders while continuing to aggregate market share. .

We recognize the current volatility and uncertainty in the economy, and we'll continue to adjust mark to market conditions in a disciplined manner to enhance the long-term value of our company.

Looking ahead, we expect a solid finish to our fiscal year, and 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.

This concludes our prepared remarks. We will now host questions.

[Operator Instructions] Your first question is coming from Alan Ratner from Zelman & Associates.

Congrats on the really strong results in a challenging market, really Impressive. First question, I guess, on the incentives first. You guided for an uptick here in the fourth quarter. Just curious if you can kind of talk through how incentives have trended through the quarter and into July? And how much of that increase is based on competitive pressures you're seeing from other builders in terms of trying to match them to maintain a certain sales pace versus you going out and trying to accelerate the level of activity a little bit? And what I'm looking at specifically is your start pace which did increase pretty meaningfully sequentially in the fiscal third quarter.

Yes, Alan. I think the incentives throughout the quarter were a bit choppy, and we've responded to the market. And in terms of competition, that kind of flows market to market. We look to maintain, and we're able to exceed our guidance on closings, and that really comes from our operators at a community level, managing their incentives to drive that result. That being said, as we work through the end of spring and deep into the summer selling season, our incentives have increased some to maintain our pace, which is going to allow us to maintain our guidance at 85, 000 to 85,500 for the year. So we feel good about our position so far in the quarter.

And while it starts increased in the quarter, they were basically aligned. Trailing 6 months starts and trailing 6-month sales were almost the same number, kind of bringing those back in alignment.

Got it. Yes. I noticed that. Obviously, it pulled back quite a bit in the first half of the year, so it makes sense. .

Second question, just on the overall consumer. These aren't big changes, but if I look at some of the disclosures you gave on the mortgage side, it looks like the average FICO score of your buyer is down about 5 points year-over-year. It's the lowest it's been in quite a while. LTV -- combined LTV is ticking higher as well. So just any commentary you can give on the strength of the consumer today and if you are seeing any impact at all from student loan repayments resuming and being reported to the credit agencies?

We're seeing more of our buyers selecting that Phase A product, and we've probably been very heavily incentivizing that FHA product, offering at 3.99, probably our most attractive interest rate on the FHA. So that's led more buyers to select that program. Not seeing a lot of impact at this point on the student loan area.

Your next question is coming from John Lovallo from UBS.

So the fourth quarter gross margin outlook of 21% to 21.5% is similar to what you put out there for the third quarter, which you obviously beat by 30 basis points. Curious on that beat, was that just a little bit more volume than you expected? What sort of drove the beat? And then in terms of the fourth quarter guide, is it really just the incentive load that -- or the potential incentive load that could drive that lower? Or are you seeing anything change in terms of sticker break or land cost, things of that nature?

Yes, John, in the third quarter, as Paul mentioned, our incentives were a bit choppy during the quarter. So as -- a quarter ago, as we looked into Q3, we were seeing the potential for needing to increase incentives through the quarter. As it turned out, it was a little more balanced and it didn't impact the closings and the margins quite as quickly in the quarter as we anticipated a quarter ago. So some margins were flat. But we still, as we sit here today, see a trend of higher incentives. Our recent sales and currently our sales and backlog do reflect higher cost of incentives. And so the closings that we see into July, August, September, we do expect margins to take that step down that we had previously anticipated would occur in Q3.

Understood. And then, yes, it was good to see the share repurchase authorization or the assumption raise from about $4 billion to 4Q to $4.4 billion. I mean what sort of drove the decision to move that higher?

It's always a balance between what we see in terms of our cash flow, our liquidity level, our leverage on our balance sheet, and we're in our target range there. And so we've had the room to be able to devote a bit more capital to the share repurchase this year. Obviously, with where our share price has been, we feel like the valuation is attractive, and so we're taking advantage of that during this time. And so the step-up in the annual level is really just within our target range for our balance sheet.

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

I just want to say, I mean, I think that gross margin guide is a lot better than many had feared. So we're pretty excited about that. I want to talk about your SG&A to start off with. You had pretty good or strong overhead control. I kind of beat you up about last quarter a little bit because it was high. I was wondering, was there anything unusual in the quarter this time? And then from a long-term perspective, is kind of the mid-7s still kind of a good long-term target for SG&A?

And then finally, on SG&A, I think you had said previously that SG&A is kind of sensitive to ASP, and so with your ASP, your average selling price coming down, should we expect this to put some near-term pressure on your SG&A?

Sure, Steve. The beat on SG&A is really a function of closings, higher closings volume. Even though our ASP was down, our closings did exceed our expectations. In terms of where we expect our SG&A to be over the long term, I do think 7% to 8%, somewhere in that range. We're always away from that on an annual basis right now.

To your point, when we have significant price appreciation, say, back in 2022, that does really good things for SG&A leverage. So our SG&A improvement from here on an annual basis is probably going to be pretty gradual, but we would expect to continue to make improvements in that in the future years.

Yes. I appreciate that, Jessica. I do note, though, that you're -- actually, hold on, sorry, I'm having some tech issues. I do notice that your closings while they were a little better than maybe what you thought they -- you actually performed quite well, given that things on a year-over-year basis were still down in terms of closing. So it certainly seems like you've got a good control on your SG&A.

The second question I had regards your ROE and your cash conversion. I think you had said when we last met that you were targeting cash flow conversion of maybe 100%, which I think some folks have had a little bit of difficulty getting to. And you -- I think we're kind of -- we're kind of looking to see what could get your ROE higher than -- or up to near 20% longer term. Both of those seem to speak to maybe some changes on the balance sheet. And I wanted to talk to you or have you talk a little bit about what your longer-term goals are with respect to your balance sheet, should we be expecting inventory or maybe rental or maybe Forestar star or something in that realm that would -- that you would make changes to that would enable your ROE to sort of get a boost? And then maybe also if you bring some inventory levels down that, that might also lead to stronger cash flow conversion. Maybe if you could just sort of opine a little bit on those 2 points, ROE going higher potentially and also your cash flow conversion.

Sure. Thanks, Steve. We are in a position to generate much more consistent cash flow yield and cash flow conversion going forward. Today, we believe with where our platform is set up where our balance sheet is. As I mentioned earlier, we're in our target range for leverage and liquidity. So we don't see major changes on that side of the balance sheet going forward.

We are very focused on inventory efficiency and improving inventory efficiency throughout all aspects of our operations in terms of our land holdings, our ownership of finished lots. And then our homes and inventory and our inventory turns there, we are very focused on continuing to improve those turns. And so with that, we do expect. We are setting expectations for ourselves to improve the efficiency of inventory levels. And so that will be a key component to stabilizing and then improving our returns on assets as well as then our returns on equity and our consistency of cash flow generation.

Back to the beginning, we talked about cash flow yield, cash flow conversion, we do expect this year's cash flow conversion to be near 100%. It may not be quite there on a consolidated basis. I think in our homebuilding operations, we would expect 100%, but consolidated maybe not quite there. As we look into future years, we would expect to be much more consistent than we have been in the past. And the key to maintaining an ROE of closer to that 20% is to have a cash flow yield of north of 10% with strong inventory efficiency.

Your next question is coming from Matthew Bouley from Barclays.

I wanted to ask on the community count. I think you said it was up 4% sequentially and up 12% year-over-year. So curious if at this point, if you can give any kind of directional color or quantification on how 2026 may shape out, just kind of given where you'll be entering the year? And are you -- I don't know, are you extending out or phasing out communities? Anything along those lines to kind of manage some of that supply growth. So just kind of early 2016 expectations and any changes on kind of how you're managing that pace of new community openings.

Matt, we do expect our community count to moderate some. It's been double digit for a bit now, and we do expect it to drift back down into the mid- to high single digit and then to kind of mid. We have opened a fair amount of markets. We've got another 4 markets out there. And that community count tends to accelerate when we get out into those communities before they start to produce at a higher level of absorption per community. .

We feel really good about our footprint, about the progress we've made in the new markets that we've opened. So not concerned about the level of community count we have. And our operators have done a great job of managing their inventory throughout our communities. And we certainly watch that closely, responding to the absorption they're getting community by community. Our total specs and completed -- well, our completed specs have come down as we expected to, and we expect that to continue into the fourth quarter. So I feel good about that. But we do expect to see moderation in community count as we move into '26.

Okay. Got it. And then secondly, your peer this morning spoke about maybe towards the end of June when rates came down a little bit, it seemed like there might have been a bit of a positive response from buyers, and I'm obviously paraphrasing what they said, but it sounded like then July was a little bit choppy. So just curious kind of what you guys are seeing around sort of the rate volatility and into the holiday and now into the early part of summer, just how have you guys been seeing traffic trends these past few weeks?

It's -- really, it has been choppy. And that choppiness can be based on rate or the noise that you see in the news cycle these days. And what we have been pretty consistent with the rates we've been offering in the market. And because we have great relationships with our realtor community, they understand what we're offering in the market. I think that we have been able to maintain across our footprint in the communities that have been performing well, have continued to. And so far, we've been on track and pleased with what we've seen into July. The incentives are up as we've spoken to. That's why we guided to a little lower gross margin into the fourth quarter, but so far, it seems to be doing okay as far as driving traffic and the incremental sales we need. .

Your next question is coming from Sam Reid from Wells Fargo.

I wanted to touch on your third-party broker relationships really quickly. I believe you're somewhat unique in that you embed third-party broker commissions and gross margin. So just curious if you had any color on broker attach rate and the rate you're paying those brokers this quarter and whether there was any step change in that number? I believe one of your large competitors has been moving deeper into third-party broker relationships. Just curious if you had to respond to that.

We've seen -- always have a long-term, very good relationship with the brokerage community, and I think we are still north of 80% with our broker attachment regulatory transactions. And we love it that they bring us a qualified buyer, and they're only paid when the home closes. And so we continue to maintain strong relationships. They have been part of our operating model for a long time, and I envision it will be for a long time.

Our average commission stayed relatively flat. So on our overall closings, it's about 270 basis points of impact, if you wanted to look at apples-to-apples gross margin or SG&A versus other builders that recorded differently.

No, that's very helpful. And then you've alluded a few times so far on the call, the higher sequential incentives in the fourth quarter, and it's definitely a very topical today. Could you just talk to the composition though of those incentives that you're embedding in that fourth quarter gross margin guide?

Earlier in the call, I think you mentioned you're leaning more into FHA. And to that end, kind of would it be reasonable to assume that perhaps some of that lower sequential on gross margin could be a function of more buyers utilizing that 3.99% buy down. And then on that 3.99% rate, we've seen it in several markets across our checks, but just curious the uptake on it? Or do you think it's more of a traffic driver versus something the buyer actually ends up going with?

Yes. The 3.99% where we have it is largely a traffic driver, and it's community specific. I mean I was in a division last week where they were offering everything from 3.99% to no BFC, no rate incentive, just market because they had solid, strong, consistent demand at the pace they expected in that community.

I think our average rate in backlog and/or on closings was just over 5%. So we really do have a range of incentives out there, including multiple programs, whether that's for a buyer that needs no money down or a special arm, which has taken a little better hold. So our operators have done a great job of managing that rate incentive. But by and large, that is the key incentive that has been driving sales for us. And that's the biggest component of the incentives that we're seeing in our mix.

I think we've talked to the 1 to 1.5 points below market pretty consistently. Last quarter, we're pretty transparent about we're probably closer to the 1.5% on average, which is what the just over 5% Paul mentioned would incorporate. .

Your next question is coming from Eric Bosshard from Cleveland Research.

Two things. First of all, I'm just curious from a stick, brick and land, where that is in terms of inflation and where you expect that to go from here?

Yes. So on a year-over-year basis, we saw a nice decline in our stick and brick costs on a per square foot basis, down about 2%. Sequentially, that was down about 1%. And then on the lot cost side, we did see the moderation. It's only been 1 quarter. So we'll see what happens next quarter, but we've talked about that moderating for some time, and so our lot cost was up a mid-single-digit percentage year-over-year, and it was slightly just ever so slightly down sequentially.

From a lot cost perspective, is there anything that you're doing to influence this? Is there anything different in the market that you're seeing that suggests the path for that forward can be a bit of a flatter curve than we've seen?

I think some of that is mix, down 1% a quarter. I wouldn't expect that with consistency. We really haven't seen a significant shift in the land market. People have pulled back on purchases and delayed purchases and more from the land market negotiating terms and timing of those terms. There certainly are some opportunities out there, but not to the extent that we would expect given the mix of lots that we have across our whole portfolio, anything that's going to change those lot valuations significantly in the coming quarters.

And then the second question from a product or price point, anything that you're seeing change. It was a quarter where you spoke to things were better than expected. I'm just curious from a product mix perspective if there are areas of incremental outperformance or underperformance.

I think we continue to see strong adoption of some of the smaller plans we've introduced across our markets, probably not having a meaningful material impact on the overall consolidated results yet, but we're encouraged by how some of the smaller product has been well received in the market and the utility is providing for the buyers.

Your next question is coming from Trevor Allinson from Wolfe Research.

First one is just on your completed and aged spec count. You've made some really good progress over the last couple of quarters working those down. We're also entering the slower time of the year. Just can you talk about how you feel about your completed inventory levels currently? And is there a target level for each of those numbers you'd like to be at as you exit your fiscal year?

We feel very good about where we are and the progress that we've made in reducing our -- especially our completed spec count. We do expect that to continue to lower. Given our cycle times and continued improvement in cycle times, we just don't need to carry as many spec homes to generate the closings that we're looking for in the quarter and as we look into '26. So we would expect that to continue to trend down. Don't have a specific target. We're going to respond to the market and make sure that we are starting homes largely in sync with our sales pace into the fourth quarter as we prep for fiscal '26.

Okay. Makes a lot of sense. And then second question is just your views on resale inventory in the markets you operate in. We've heard a lot of builders talk about retail inventory, not being very competitive new homes. At the same time, we've seen a pretty notable rise in resell inventory since really the middle of last year coincided with some overall demand weakness. So are you seeing more competition there from retail inventory? If so, could you rank where that stands in terms of headwinds in context of affordability and sentiment issues?

In the conversations I have with our sales folks and our models, I'm not hearing resale as being a big pushback from us or that we're losing customers to resell inventory. That housing stock is generally quite a bit older than it otherwise would have been because it sat dormant for a while and was not brought to market, plus some of the interest rate incentives are not nearly as compelling that are being offered by the resale owners. And it's still a very attractive position for buyers, especially new homebuyers to come look at new home construction. First-time home buyers look at the home construction.

Your next question is coming from Rafe Jadrosich from Bank of America.

It's Rafe. I wanted to ask just when you compare the performance in the larger markets that you operate versus some of the smaller markets, maybe where you have more private competition. Is there a big difference? And what are you seeing from the private smaller homebuilders?

I would say that throughout this fiscal year, we've seen more consistent performance to budget or to planned absorptions from the markets that are smaller, where we operate mostly against the private builders with maybe a public or 2 in those markets. And those are the markets that largely we have entered as well over the last several years, and our teams are just starting to build out their teams and catch their stride in their communities and performing at a good level.

I think as you look at the larger markets, there certainly is competition, always has been, which we're happy to play in that space, and operators doing well in those as well. But I think if you look at comparison to plan, we're seeing a little better performance this year in the markets, the secondary markets and markets where we have less public builder competition.

Good. That's interesting. And then in terms of the land cost impact, I think the last couple of quarters, some -- there is some lot cost pressure from mix. In this quarter, it was a tailwind. If we were to sort of normalize for that, what are you seeing for sort of underlying lot cost in inflation? And just given some of the softness in the market more recently, like when would that sort of underlying trend when is there an opportunity for that to come lower?

I think in the near term, we would expect to continue to see mid-single-digit inflation in our lot cost. I mean it's kind of a flow of inventory that's going through the homes we closed over the next 12 months. They're pretty much on lots that are identified costed and largely owned by us today. .

Going forward, if we continue to see a little bit of softness or changes in the marketplace and that results in changes in land and development costs, we expect to see relief from that inflation going forward, but that would be several quarters out where that inventory came into production and closings.

Your next question is coming from Michael Rehaut from JPMorgan.

Great. Appreciate it. First, I just wanted to circle back and make sure I fully appreciated or understood the trends around incentives during the quarter and how they've progressed year-to-date and how you're thinking about them in the back -- in the next quarter or 2. One of your competitors this morning talked about incentives now up each of the last 2 quarters 70 to 80 bps on average, sequentially each of the last 2 quarters. I was wondering if you're seeing any type of similar trend, at least on average? I know obviously, market-by-market, it varies a lot. And if you would expect incentives to continue to rise over the next quarter or two.

Mike, I don't think we've quantified our incentives other than talking about them in a high single-digit percentage range. I mean, obviously, if it's netting its revenue or it's in cost of sales, it all falls out in gross margin, which is why users continue to focus on that forward-looking data point. And we did, as we said, start to incentivize more heavily here over the last couple of weeks to drive what we're trying to achieve for the full fiscal year. And so we do expect at the midpoint a 50 basis point decline in our gross margin from Q3 to Q4.

Okay. No, I appreciate that. And I guess, secondly, anything that maybe is offsetting that rise in incentives that you saw this past quarter going into next quarter? Obviously, this quarter still came in above -- a little bit above your guidance, next quarter down 50 bps is not anything too material relative to perhaps some more bearish concerns out there. So anything on the tailwind side that you can kind of put your finger on that's offset some of those headwinds, be it cost or even tariffs or other areas of the construction cost basket?

We have seen slight improvement in our stick and brick cost, and so that is a partial offset. But our commentary really over the last year has been that incentives have been increasing. That's been the main driver for the gross margin, decline over the last year. Our operators are striving every day to strike the best balance between hitting pace and maintaining margin in each community to maximize returns. And so they're using all the levers they have with incentives to try to balance that. And so we have seen the pace of incentive cost increases and the pace of margin decline moderate a bit over the last couple of quarters. And then this quarter, it held still flat sequentially, but the trend is still pointing towards a bit higher incentives. And we don't see significant offsets to that, though we will continue to work on costs on the construction side. .

Your next question is coming from Mike Dahl from RBC.

So if we stick with the cost side of the equation, I mean, we may or may not be in a position to kind of refine views on tariffs to ease all that fun stuff -- sorry, can you hear me?

Yes. We cut out after fun stuff.

So all the fun stuff around tariffs and potential labor dynamics. You guys given your position in the market and your breadth, have a good holistic view of things like that. Can you just give us your sense of as we've kind of refined as all the headlines come out? Obviously, this would impact your fiscal '25, but when you think about cost for construction next year on sticks and bricks and then availability of labor, how are you thinking about things?

Mike, we work on our costs every day. And that has been consistent and certainly is going on today in our divisions. From labor availability, it's plentiful. We have the labor that we need. Our trades are looking for work, and that's why you've seen sequential and year-over-year reduction in our cycle time because we have the support we need to get our homes built. And given those efficiencies, we do expect to continue to see reductions in stick and brick over time. Some of that is from design and efficiency of the product that we're putting in the field. And some of that is just from the efficiency of our operations and from the competitiveness from the labor base that's out there today.

And then shifting gears, you had a healthy result in terms of kind of the step-up in rentals, both revenue and profitability. It's still a pretty dynamic market out there. So can you just help us understand some of those moving pieces put together in 3Q, how you're thinking about the next couple of quarters given the backlog that you've got on the rental side?

Yes. We have the backlog of identified properties that are in line to sell. We did see a bit of a step-up there in the revenue there this quarter, a little bit better margin on those. That market is still experiencing a lot of transition in higher rate environment and cap rates that have changed over the last few years. And so we're working on each one of those projects, working them closer to sale. And that is one element of our margin guide as we look to Q4. We would expect -- while revenues may still be in the same ballpark or better than where it was this quarter, we do expect margins on the sales in Q4 to be lower in the rental segment than they were in Q3.

Your next question is coming from Alex Rydell from Texas Capital Securities.

Geographically, can you comment on demand trends and highlight the outliers?

We typically don't go into a whole lot of geographic discussion. It's kind of a roll-up of everything we're doing, and we see some of the same national trends, I would say, you see with others and in the resale markets. There's been a lot of a change in the dynamics in the Florida markets. And perhaps most so there. Other markets continue to be consistent performers, where there's been limited inventory and limited development of lots, and housing production continue to see strong demand in those markets.

Our supplemental data presentation will include our sales and active selling community detail. Again, I think it gets posted after the call. So you'll see on a sequential basis, there's really no outliers outside of the Northwest sales. We're a little bit lagging. And I think we attribute some of that just to the tech buyer and what's going on with potentially uncertainty of the job market and whatnot in the Pacific Northwest. But Otherwise, we saw a decent increase at least on a sequential unusual seasonal basis in our sales, which was a positive.

And real quick, could you talk a bit about your low cancellation rate, what it's telling you about the economy, consumer confidence and buyer credit quality?

At the rate that we're seeing, which is kind of below our historical average, is that the buyers that are out there and our FICO score at what 720 even with the transition to FHA rate, I think some of that transition is people taking advantage of the lower rates we can offer with a rate buydown, but people are having to work to get there.

And as we introduce smaller product and continue to try and reduce our ASP to expand into that buyer base, we certainly have to go through the process of working through credit, but our teams do a very good job of that. And our mortgage company does an exceptional job of working with those buyers to get them in a position to close on their own.

During the quarter, over 12,000 of our customers were first-time homebuyers. And so they have people that have worked very hard to get on the homeownership ladder, and we're very proud of this company that we're able to make that happen for so many families quarter after quarter after quarter. .

Your next question is coming from Alex Barron from Housing Research Center.

I'm sorry if I missed if you mentioned the build time, but can you repeat that? And is there any particular initiatives to try to lower that, such as more in-house labor or manufacturing trusses or any of that kind of stuff?

None of that as far as integrating. For us, we have the labor base that we need and a very strong trade base that's very supportive of us. So we don't feel the need to internalize any of that and take on that additional challenge and risk at this time. We've seen sequential reduction in that cycle time over a couple of days. And then 2 weeks over last year, we're sitting right where we want to be 3 months, which is below our historical norms. I would not expect to see a significant decline over the next 12 months, but teams are very focused on maintaining that and gaining advantage where they can on cycle time.

Got it. What about efforts to drive greater affordability such as smaller lot sizes or smaller floor plans, any initiatives on that front?

I think both of those. Alex, you can look at our average square footage, and it's declined consistently over really the last 24 months. I would expect that to continue some. And the key to affordability in this country is to provide a smaller home site with a smaller home that meets the ability of our buyers to close on our home and meet some monthly payment that fits what they're looking for. We just need a little extra help from local governments to allow us to achieve that really across the U.S., but that's an opportunity that we continue to explore every day.

Our average square footage on homes closed was 1,956, which was down 1% from a year ago, which has been just a very gradual decline, but we're down in the last 5 years a high single-digit percentage on our average square footage. So we expect that just gradual trend of the average shrinking to continue.

Okay. Great. Good luck for the rest of the year. .

Your next question is coming from Jade Rahmani from KBW.

Can you discuss what you're seeing in the market in terms of home prices across the board? If you could quantify any range of price decline you're seeing and also what you might expect going forward?

We focus predominantly on incentives where we can and that's allowed us to maintain a lot of our base pricing across the country. That doesn't mean you won't find places where on select houses, in select communities, we are making actual base price reductions. That's generally much more targeted, though, in terms of on completed, aged inventory.

And are you seeing competitors with your product, primarily new homebuilders, but also in the existing home market cut price?

I think competitive pressures across the board in any given submarket, we're seeing some competitors cut price or resell cutting price, and our local operators respond to every one of those dynamics on a weekly basis. And we're still seeing sales paces in line with the targeted goals for those communities [Audio Gap] at the right margins to drive the returns we're looking for. So it's going to be a competitive thing we deal with neighborhood by neighborhood and trusting our local operators to meet their market week to week to week.

And we do generally see though, by and large, builders are much more rational today. You can look at another competitor's results this morning. And I think most builders today are taking a very balanced approach, as it relates to pace and price and not just slashing prices across the board. So we're happy to see the rational approach that the industry is taking today.

Your next question is coming from Jay McCanless from Wedbush.

And apologies if I missed this, but did you all have ay comment on the Canadian softwood lumber agreement? What gross margin impact that might have on Horton?

No, we haven't commented on it. And it will have some potential impact, but we've not quantified that. I know it is a significant step-up in the tariff rates that I think go into effect next month. But we're buying some percentage of that wood, and there's some substitutionary product that would be available as well based upon where that pricing ultimately settles.

Okay. And then the second question, and I'm sure you guys addressed this earlier, but to hold the gross margin like you all did have the speed, I think that's very impressive, especially given some of the incentives that your competitors are putting out there, I guess, is there anything from a geographic or a product standpoint that you haven't called out already in this call that you might want to address just to give people a sense of how you might be able to hold that gross margin into the fourth quarter?

No. I think, Jay, that the performance this quarter is a credit to our teams out in the field, managing week-to-week, their flow on buyers and sales and traffic that they need to achieve their goals for the quarter. And we were able to outperform, which honestly was a surprise to us relative to our guidance. But we do expect to see a step down in margins as to our guide of 50 basis points as you look into this quarter. We'll be happy to be pleasantly surprised if that occurs again this quarter, but it's very early in the quarter to be able to tell where that's going to land. 54% of the homes that we closed this quarter were sold in the quarter. So we still got a long way to go in this quarter to see how the margin plays out by quarter end.

Great. And then the last one I had. Did you all give any color about fiscal '26 community growth or how you expect that to trend?

Yes. Paul mentioned that it should ultimately moderate. It's been a low double-digit percentage on an annual basis -- or excuse me, on a year-over-year basis for a while. And we would expect that to moderate to the high single digit, and ultimately, probably more like a mid-single-digit community count growth going forward.

That concludes our Q&A session. I will now hand the conference back to Paul Romanowski for closing remarks. Please go ahead.

Thank you, Matthew. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results on Tuesday, October 28. Congratulations to the entire D.R. Horton family on producing a solid third quarter. We are honored to represent you on this call and greatly appreciate all that you do.

Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.