管理層發言
Good morning. Welcome to the third quarter 2026 earnings conference call for D.R. Horton, America's Builder. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Good morning. Welcome to our call to discuss our financial results for the third quarter of fiscal 2026. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call. 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. 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 presentation section under news and events for your reference. I will turn the call over to Paul Romanowski, our President and CEO.
Thank you, Jessica. Good morning. I'm pleased to also be joined on this call by Mike Murray, our Chief Operating Officer, and Bill Wheat, our Chief Financial Officer. The D.R. Horton team delivered a solid third quarter, highlighted by earnings per diluted share of $3.20. Consolidated pre-tax income totaled $1.2 billion on $9.2 billion of revenues, resulting in a pre-tax profit margin of 13.3%. We closed 23,983 homes during the quarter, which was at the high end of our guidance range. We achieved a home sales gross margin of 20.7%. We remain focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we generated $3.4 billion of cash from operations. We returned all of it to shareholders through repurchases and dividends. For the trailing 12 months and to June 30th, our home building pre-tax return on inventory was 17%, while our consolidated returns on equity and assets were 12.8% and 8.5%.
Our return on assets ranks in the top 20% of all S&P 500 companies for the past three-, five-, and 10-year periods, demonstrating that our disciplined, returns-focused operating model delivers sustainable results and positions us well for continued value creation. We work every day to leverage our industry-leading platform, unmatched scale, efficient operations, and experienced teams to bring homeownership opportunities at affordable price points to more Americans. Sixty-five percent of our mortgage company's closings this quarter were to first-time homebuyers. Our teams manage each community with discipline, balancing pace, price, incentives, and inventory levels to meet demand and maximize returns. Affordability constraints and cautious consumer sentiment continue to impact new home demand. Our operators will continue to adjust as market conditions evolve. Mike?
Earnings for the third quarter of fiscal 2026 were $3.20 per diluted share compared to $3.36 per share in the prior year quarter. Net income for the quarter was $905 million on consolidated revenues of $9.2 billion. Home sales revenues in the third quarter totaled $8.7 billion on 23,983 homes closed, compared to $8.6 billion on 23,160 homes closed in the prior year quarter. Our average closing price was flat sequentially and down 2% year over year to $362,000. This is below the average price of new homes in the U.S. by approximately $155,000, or 30%, reflecting our continued focus on affordability.
Net sales order value in the third quarter totaled $8.4 billion on 23,084 homes sold, both flat with the prior year quarter. Our cancellation rate for the quarter was 20%, up from 17% in the prior year period and from 16% sequentially, within our normal historical range. The average number of active selling communities increased 2% sequentially and 9% year over year. The average price of net sales orders was $365,600, essentially flat both sequentially and year over year.
Our gross profit margin on home sales revenues in the third quarter was 20.7%, above the high end of our guidance range, reflecting lower stick and brick costs and slightly lower incentives than the second quarter. However, we expect incentives to remain elevated relative to historical levels. On a per square foot basis, home sales revenues and lot costs were flat sequentially, while stick and brick costs were down 2%. Year-over-year, home sales revenue was down 3%, stick and brick costs were down 5%, and lot costs were up 5%. We currently expect our home sales gross margin to be relatively flat in the fourth quarter compared to the third quarter. Bill?
Our home building SG&A expenses in the third quarter increased 8% compared to last year. SG&A as a percentage of revenues was 8.3%, up from 7.8% in the prior year quarter. We remain focused on managing our platform with discipline to gain market share efficiently, and we expect to return to positive SG&A operating leverage when revenue growth resumes and our average sales price and community absorption rates stabilize. Paul?
We started 23,900 homes in the third quarter. We ended the quarter with 38,000 homes in inventory, down 1% both sequentially and year over year. Twenty-three thousand three hundred of our homes at June 30th were unsold. Seven thousand six hundred of our total unsold homes were completed, of which 600 have been completed for more than six months. For homes closed in the third quarter, our median cycle time from home start to home close improved by roughly three weeks year over-year. Our improved cycle times enable us to hold less housing inventory and turn it more efficiently. We expect starts in the fourth quarter to be lower than the third quarter. We will continue to manage our inventory levels and starts pace based on market conditions. Mike?
Our homebuilding lot position at June 30th consisted of approximately 570,000 lots, of which 22% were owned and 78% were controlled through purchase contracts. We continue to actively manage our investments in lots, land, and development based on market conditions. We remain focused on relationships with land developers across the country so we can build more homes on lots developed by others. This approach enhances our capital efficiency, returns, and operational flexibility. Our own lot position is down 13% from a year ago. In the third quarter, 67% of the homes we closed were on lots developed by either Forestar or third parties, up from 66% in the prior year quarter. During the third quarter, our homebuilding investments in lots, land, and development totaled $2.1 billion, including $1.5 billion for finished lots, $520 million for land development, and $75 million for land acquisition.
In the third quarter, our rental operations generated $31 million of pre-tax income on $266 million of revenues from the sale of 601 single-family rental homes and 339 multi-family rental units. At June 30th, our rental property inventory totaled $3 billion, including $2.7 billion of multi-family rental properties and $321 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations, and we currently expect our rental inventory to remain around $3 billion. Turning to our financial services operations, pre-tax income for the third quarter was $70 million on $221 million of revenues, resulting in a pre-tax profit margin of 31.9%. Mike?
Forestar, our majority-owned residential lot development company, reported third quarter revenues of $407 million on 3,659 lots sold, with pre-tax income of $49 million. At June 30th, Forestar's owned and controlled lot position totaled 92,000 lots. Sixty-six percent of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. During the third quarter, we purchased $360 million of finished lots from Forestar. Forestar's strong, separately capitalized balance sheet, national operating platform, and lot supply position them well to provide essential finished lots to the homebuilding industry and to continue aggregating significant market share over the next several years.
Our capital allocation strategy remains disciplined and balanced, supporting an operating platform that delivers attractive returns and substantial operating cash flows. We maintain a strong balance sheet with low leverage and healthy liquidity, providing significant financial flexibility to adapt to changing market conditions and opportunities. At June 30th, we had $6.1 billion of consolidated liquidity, including $2.1 billion of cash and $4 billion of available capacity on our credit facilities. Total debt at quarter end was $7.1 billion, with $600 million of homebuilding senior notes maturing over the next 12 months. Our consolidated leverage at June 30th was 23%, and we continue to target leverage of around 20% over the long term. During the first nine months of the year, homebuilding cash provided by operations totaled $1.3 billion, and consolidated cash provided by operations was $881 million.
During the third quarter, we paid cash dividends of $0.45 per share, totaling $127 million, and our board has declared a quarterly dividend at the same level to be paid in August. We also repurchased 4.2 million shares of common stock for $616 million during the quarter, reducing our outstanding share count by 6% compared to a year ago. At quarter end, our stockholders' equity was $23.8 billion, down 1% from a year ago, while book value per share increased 5% from a year ago to $84.85. Jessica?
Looking ahead to the fourth quarter, we currently expect consolidated revenues to be in the range of $8.8 billion to $9.3 billion, with homes closed by our homebuilding operations to be in the range of 22,500 to 23,000 homes. We expect our home sales gross margin for the fourth quarter to be in the range of 20.5% to 21%, and our consolidated pre-tax profit margin to be between 12.3% and 12.8%. For the full year of fiscal 2026, we now expect consolidated revenues of approximately $32.5 billion to $33 billion, and homes closed by our homebuilding operations of 83,800 to 84,300 homes. We now forecast an income tax rate for fiscal 2026 of approximately 25%, and still expect operating cash flow of at least $3 billion, common stock repurchases of approximately $2.5 billion, and dividend payments of around $500 million. Paul?
In closing, our results and positioning reflect the strength of our experienced teams, industry-leading market share, broad geographic footprint, and focus on delivering quality homes at affordable price points. These are key components of our operating platform that support our ability to grow market share, generate substantial operating cash flows, and consistently return capital to our shareholders. We recognize the current volatility and uncertainty in the broader economy, and we will remain agile and disciplined as we focus on enhancing the long-term value of D.R. Horton. Finally, I want to thank the entire D.R. Horton family, our employees, land developers, trade partners, vendors, and real estate agents for your continued dedication and hard work. We remain committed to continuing to improve our operations and creating home ownership opportunities for even more individuals and families. This concludes our prepared remarks. We will now host questions.
分析師問答
Thank you. At this time, we will be conducting a question and answer session. In the interest of time, we ask that participants limit themselves to one question and one follow-up on today's call. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question today is coming from John Lovallo from UBS. John, your line is live.
Good morning. Thanks for taking my questions. The first one is that stabilization is something that we have heard numerous times in our channel checks, despite continued volatility not only from interest rates but from geopolitics. Would you agree with that assessment, and do you think that we are getting to a point where we are starting to form a bottom here?
I would say that when looking at our sales, our sales were relatively in line with normal seasonality. They were a little softer post our call in April, and we still see plenty of buyers out there in our sales offices as we travel and in front of people. It's just needing to see them be a little more confident in the overall economy and their ability to move forward with a purchase today.
Understood. You guys slightly pulled back, I think, about 3% on your full-year deliveries, despite being within, actually towards the upper end of the third-quarter range, and with flattish orders on a year-over-year basis. Is the trimmed outlook predominantly driven by just uncertainty in consumer confidence and geopolitics as we move into the fourth quarter? Is it a function of maybe lower-than-internally-expected orders in the third quarter? Are you just moderating growth to maintain margin?
It was lower than our internal expected sales rate. We really needed to see a little better-than-normal seasonality in the quarter and felt like we could see that at the beginning of the quarter. That demand softened a little bit as we went through the quarter, and hence the reduction in our annual guide.
To your point, John, we're happy with the trade-off of what we were able to achieve from a gross margin perspective at the lower sales volume level.
Yeah, 100%. Thank you, guys.
Thank you. The next question will be from Stephen Kim from Evercore. Stephen, your line is live.
Yeah. Thanks very much, guys. Impressive results in what I consider to be a pretty tough environment. That's kind of related to my first question. When you think about the current environment and you look at your outlook for, let's say, long-term through-cycle returns, how do these current results stack up relative to that? Do you regard your current returns as about average longer term? If not, what are the elements that you expect might push your returns higher or lower over the longer term?
Yeah, Steve. Our current returns are lower than where we expect them to be longer term. Our margins, while in the longer-term historic range, we believe our longer-term stabilized margin should be a bit higher than this. Our operating margin, including our SG&A leverage, should be better than this over time when we're seeing more consistent growth. We have not seen growth on our top line for a few years here. We're always positioning for growth, and so with a little better operating leverage. Frankly, I think we still feel like we have some opportunity to improve our capital efficiency in our homes and inventory and our land. We continue to focus on that. Overall, we would expect our returns on our capital, whether it's ROA or ROE, to be higher longer term than they are right now.
Well, that's encouraging, and appreciate that color, Bill. Second question kind of relates to scale. I think you talked about when growth returns, that's when you think SG&A could be leveraged, and that makes sense. However, I was curious if you could contextualize that given the fact that we've seen a lot of consolidation in the industry from competitors, both foreign and domestic. I'm wondering if you can comment on how you think about your opportunity set from a scale perspective particularly. I know you've been hard at work generating a lot of economies of scale. Your volume is kind of stabilized here. You still talk about future growth. I'm curious: can you talk about the importance of scale for you to achieve the efficiencies that you desire? Should we be thinking there's another sort of step function higher in volume that could unlock some of these opportunities? Maybe you could think about it a little differently; you could walk us through that.
Steve, when you look at our scale today or at our revenues and absorption being relatively flat over the last couple of years, that's while we have been expanding our footprint. We've opened 30 or so markets over the last five years. We've lacked some leverage on our SG&A because of creating that footprint. I think that footprint geographically puts us in a great position as we see demand rebound a little bit. We see some strengthening in consumer confidence and demand. We feel we're in a great position to gain scale nationally. We also feel very good about our positioning at a local level. That scale is still very important to us. We see the benefits of it, believe in it, talk about it, and still have our operators in a position to maintain their position in the market and grow when the opportunity is there for us.
As a reminder, we're only number one in half of the markets we operate in today. We still have a lot of opportunity to continue to grow our share locally across the country.
That's great perspective. Appreciate that, guys.
Thank you. The next question will be from Alan Ratner from Zelman. Alan, your line is live.
Hey, guys. Good morning. Thanks for the detail so far and taking my question. Obviously very impressive results on the gross margin. It looks like a lot of that has been driven by really strong cost controls. I'm curious, as you think about the cost environment today, obviously you've done a great job of pushing back on suppliers and trades and driving down costs where you can. Where do you think you are in that process? Because as we look at announcements on tariffs and fuel and other inputs, do you feel like there's still further room to drive costs lower, or is there a risk over the next handful of quarters that that could actually reverse given all of those headwinds I just mentioned?
We've seen good improvement in our cost containment efforts in comparison to the prior year. It's an ongoing battle. There is certainly some headwind out there right now with some fuel cost increases. I don't believe the recently announced tariff changes from Canada will have a material impact on D.R. Horton and our footprint. I'm looking for us to hang on to, perhaps squeeze out a little additional cost improvement in future quarters. It's more challenging now, just as you get closer to an optimal state to get significant improvement going forward.
Thanks very much.
Thank you. The next question will be from Matthew Bouley from Barclays. Matthew, your line is live.
Morning, everyone. Thanks for taking the questions. Wanted to ask on incentives. I think you said the incentives were slightly lower quarter-over-quarter. You mentioned demand softened a bit during the quarter, looked like finished spec came up slightly, and obviously interest rates are where they are. It seems like you're still guiding to that flattish sequential gross margin going forward. Maybe you could unpack what's assumed around incentives there and why wouldn't there be kind of an incremental incentive headwind going forward?
In the current environment, we saw a slight improvement in incentives, but as Paul mentioned, it was a bit softer later in the quarter. We do expect incentives to remain elevated. As Mike just discussed, we may still see some stick and brick savings, but we have achieved a lot of what we expect to achieve today. Really where we are is a relatively stable outlook going into the next quarter. Obviously a lot of our sales and our closings in the quarter occur in the same quarter, so there's still some uncertainty around what may be required going forward. Right now, the visibility we have points to a relatively stable margin going into Q4.
Okay. Got it. Thank you for that. Then, secondly, stepping back, wanted to ask about your exposure to the first-time buyer. I think it looks like you're around two-thirds today, first-time buyer, and we can go back many years when that was a lower percentage. Given the state of the first-time buyer today, would you say that the two-thirds of the business you're at now stabilizes? Do you expect it to continue to move higher because you're providing affordable options, or might you mix back toward move-up buyers over the multi-year timeframe?
The positioning of our business today lends itself to still seeing a significant portion of our buyers in that two-thirds range as first-time homebuyers. There's some opportunity to go up some. We'll certainly take it. If we see more buyers out there, we're happy every day to sell them a home. That said, as we penetrate markets, we also take the opportunity to move upmarket a little bit. I think blending that at a community level and at a division level, our operators are charged every day to find the market and meet that market. I would expect us to see a first-time homebuyer segment relatively consistent with what we see this quarter.
All right. Well, thank you, Paul. Good luck, guys.
Thank you. The next question will be from Eric Bosshard from Cleveland Research. Eric, your line is live.
Good morning. The stick and brick was down 5% year-over-year. I'm curious where you're seeing that, if labor is a meaningful piece of that. The path forward you expect from here and how this is influencing or contributing to gross margin.
Sure, Eric. The majority of the savings we're seeing is still on framing, which would be inclusive of labor. As we've talked about previously, we pay for a lot of things turnkey, so we can't split it out perfectly between labor and materials. Framing was our biggest cost category of savings. Very positively, across all of our major cost categories, we saw a decline in terms of our costs on closings in the third quarter. We expect that to hold at least into Q4. Maybe into 2027, we start to see a slight lumber headwind again with where lumber prices have gone, but we feel good for at least the next quarter or so.
In terms of how that is supporting gross margin or supporting the ability to increase incentives, how are you thinking about that or planning that, or how is that playing out?
The stick and brick cost structure and incentives in our mind are separate things. We think about the home we want to deliver on the lot, try to build it as efficiently as possible, and then look to go to market with the appropriate price and incentives that stimulate demand in the marketplace to get the pace we need to drive the return we need, and then manage the return on the basis of pulling back or increasing incentives to stimulate demand or to improve margin. They're two separate parts of the equation for us.
Secondly, you were relatively clear that in the quarter, a little less volume and a little more margin. Is this the path forward strategically? I know it moves around, but is that kind of plan A from here?
That was our plan this past quarter, and we're going to respond to the market based on what we see quarter to quarter, month to month, really week to week. We're managing our business very efficiently, responding to the market as it comes to us. Our operators did a great job of delivering on the quarter. In terms of our guidance in closings and margin, we did make the decision to hold margin a little more than push into the units, and hence the reduction in our guide for the year. We're going to continue to manage the business as efficiently as we can to drive the best returns that we have at a community level.
Thank you.
Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live.
Thanks so much, everyone, good quarter. You gave a lot of helpful color on lot cost inflation. I believe it was up 5% year-over-year in the third quarter. Curious as to what's embedded for lot cost inflation in the fourth quarter, and then contextualize where you see that line item potentially tracking into next year, whether you expect to get some help just from slack in the horizontal supply chain, or whether there could be some implications from higher oil costs on some of those horizontal lot inputs. Thanks.
We expect to see similar lot cost appreciation. Although we're seeing some savings and some benefit in the development cost, that won't come through for several quarters, well into 2027 and 2028, for anything that we are seeing today. Expect to see a similar level of lot cost inflation as we head into the fourth quarter.
That's helpful. Maybe let's switch gears and quickly touch on SG&A. There was a step-up in SG&A spend on a dollar basis. I realize there was probably some community count embedded in that. Just if you could contextualize some of the levers behind the higher year-over-year homebuilding SG&A dollars, so we can understand how we should be thinking about that, both for the quarter and also for FQ4. Thanks.
Sam, the primary driver of the SG&A has been our community count increase. Our active communities were up 9% year-over-year. Our total dollar spend of SG&A was up 8%. That's relatively in line, and that's been a trend for the last two to three years as we've added approximately 30 markets over the last several years. Yet our volume, our absorptions per community have declined a bit, our overall revenues have not increased. We've been adjusting our ASPs to meet the market as well. We've had some de-leveraging over the last couple of years, but at the point at which we begin to see stabilization in pricing and in absorption pace, we would expect then to be in position to get forward operating leverage on SG&A. Right now, we're in a position where we've built the infrastructure; we need to see the growth coming off of that in the future.
Thanks so much. I appreciate it.
Thank you. The next question will be from Ryan Gilbert from BTIG. Ryan, your line is live.
Hi. Thanks. Good morning, everyone. I wanted to circle back on the finished spec inventory question. It looks like finished specs are up around 2,100 homes sequentially, which is more than the typical sequential increase. Is that more than you expected, and is that tied to some of the softer results in May and June versus what you saw in mid-April? How should we think about potential gross margin implications for rightsizing the spec count?
When we look at the spec counts, it's a function of a few things. One is improvements we continue to see in our construction cycle times. We're finishing homes faster. At the same time, our average selling communities are up 9%, so that's increased more than those completed specs. Therefore, we have fewer completed specs per community at this time. The other part, on the forward margin piece, those completed specs are very recently completed. You can look at our age of specs, and they're actually down a few hundred units year-over-year. We feel pretty good about going into the fourth quarter and able to provide a stable margin guide.
As we said in the prepared remarks, we do expect our Q4 starts to be lower than Q3, and we'll continue to adjust our starts accordingly based on the demand that we're seeing. Of our total completed specs, only 600 have been completed and unsold for greater than six months, and that's actually down from 800 sequentially. To Mike's point, the vast majority of our completed specs are very fresh.
Right. Okay. That makes sense. Thanks. Second question is on community count growth. You've talked in the past about that growth rate decelerating to a mid-single digit rate at some point. Given the continued declines in the controlled lot count, should we recalibrate that mid-single digit community growth rate expectation, or do you think you can continue to grow community count despite lower controlled lots?
I think that would still be our base case over the longer term; our goal would be to have roughly mid-single digit community count growth. It can be a little bit choppy. It's actually been sticky at the low double digits for quite some time. We did see a slight moderation to a 9% increase on a year-over-year basis this quarter, and 2% sequentially. We started to see it trend down modestly and would still expect it to trend down to mid-single digits over time.
Okay, great. Thanks so much.
Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live.
Good morning. I was wondering if you could talk about any meaningful regional variation you're seeing in terms of demand and any MSAs that stand out as being stronger or weaker. Related question: we've heard some MSAs with tech exposure being strong, like parts of the Bay Area, while some others like Seattle have been weaker. Is there anything you're observing there?
What you mentioned is consistent with what we're seeing, similar to what we talked about last quarter. Across our north operating area, which includes the Mid-Atlantic states, the Ohio Valley, and the Midwest, we're seeing relative strength in most of those markets. There's a little more weakness in the Northwest, especially in Seattle, where we've seen shifts in software jobs, more layoffs, and some headwinds to demand in those markets. That's been consistent through this quarter.
Okay. Any other regional variations you'd highlight in terms of Sun Belt, Northeast, or others?
The Florida markets seem to be performing pretty consistently, and we see similar consistency across parts of the Southeast, which has been encouraging.
Great. One last one: stick and brick costs down year-over-year and cycle times improved. Is there a theoretical limit or floor for cycle times? How should we think about that?
You'll never hear us say there's a floor in terms of our ability to run our business more efficiently. That said, the reduction has come more from complete-to-close than from start-to-complete. In construction cycle time, we've come down maybe a day sequentially. Most of that reduction has been from complete-to-close. Our focus in the field and in our operations is to sell homes earlier in the process. We're building homes at the most efficient rate in the company's history; we need to get back to selling homes earlier in the process. That will help reduce the overall start-to-close cycle time, and we do think there's room to bring that down further.
Understood. I'll turn it over.
Thank you. The next question will be from Rafe Jadrosich from Bank of America. Rafe, your line is live.
Hi. Good morning. Thanks for taking my question. First, can you remind us the lag between when lumber prices move and when it shows up in your gross margin for delivered homes?
It usually takes a few quarters for that to come through based upon how we're kind of priced to an average price at the point of purchase order, and then those homes have to go through the production process to be sold and closed to show up in margin. Two to three quarters is fair.
Sorry, two to three quarters. The second question: your operators have been nimble, balancing margin and volume. Earlier this year, there seemed to be more of a push into volume in the first half, and there's been an adjustment here. Can you talk about what caused that shift? Was it where Q3 orders came in, or the outlook for Q4? What would it take to shift back to more aggressive volume given your long-term ambitions and pipeline?
Our efficiency and reduced cycle times have allowed us to respond intra-quarter to changes in demand. In Q2 we saw a strong early spring selling season which allowed us to increase starts pace, and then we adjusted as demand softened in the later part of Q3. That's why we anticipate Q4 starts to be below Q3. It's our operators being nimble, responding to the market, and acting on what they see in the field.
Thank you. That's very helpful.
Thank you. The next question will be from Trevor Allinson from Wolfe Research. Trevor, your line is live.
Hi. Good morning. Thanks for taking my questions. First question is back on incentives and your rate buydown program. With rates moving higher through the quarter, have you made any adjustments to those programs? If so, can you talk about what rate you are buying down to on average currently, and how does that compare to recent quarters?
It was actually the first quarter that we did see our rate in backlog tick up because of that move in rates. We saw our average buydown decrease slightly to 1.6% from 1.7% in the second quarter. The mortgage rate for our buyers in backlog utilizing our mortgage company at June 30th was 4.9% against a rough market rate of about 6.5%. We're still in the market pretty consistently, with anywhere from about 4.99% to 5.5%, depending on mortgage product. We have an array of offerings, so you'll find some items outside of that band, but that's the largest piece of our offering today.
Thank you for that, Jessica. Second question: last quarter, you talked about selling specs earlier in the construction cycle, expecting gross margin benefits. Can you quantify or discuss any benefit you saw in Q3 from that process? Should we expect incremental tailwinds from selling earlier in the construction process in Q4?
We did see lower incentive levels on those closings. At the same time, selling earlier provides much greater efficiency in turning inventory. As soon as construction is complete, the buyer has gone through mortgage qualification and is ready to move into their home, which reduces the time homes sit completed-and-unsold.
There's certainly more room for improvement. We saw a step up in those closings this quarter, but it's not where we ultimately want it to be.
Thank you for all the color, and good luck moving forward.
Thank you. The next question will be from Susan Maklari from Goldman Sachs. Susan, your line is live.
Thank you. Good morning, everyone. My first question is on the rental side of the market. Can you talk about what you're seeing there, especially post the housing legislation that passed, and how you're thinking about the outlook in terms of that part of the business?
We certainly saw, until it was settled, some uncertainty in that market, and a pullback from some single-family-for-rent purchasers. We have seen them come back with interest. The legislation is fairly new, so we haven't seen a significant shift yet. We're encouraged about our position and continue working with buyers in that segment.
That's helpful. Thinking about the priorities of capital allocation, you reiterated the guide for $2.5 billion of buybacks. Considering where you are already into the quarter and the seasonality of cash flows, how should we think about potential upside there? What are you watching for to be more active, and can you talk about other priorities in capital allocation?
Our share repurchases and dividends are governed by our cash flow. Right now, our visibility to cash flow is to meet or exceed $3 billion. Our year-to-date spend on repurchases has been in excess of our cash flow year to date. We expect a strong cash flow performance in Q4 to get that more in line. At this point, we don't have visibility to any significant upside for additional repurchases this year. We'll monitor cash flow as we move through the quarter and adjust accordingly.
Okay. Thank you. Good luck.
Thank you. The next question will be from Mike Dahl from RBC Capital Markets. Mike, your line is live.
Morning. Thanks for taking my questions. Maybe to expand on Susan's question, can you broaden out and give us your perspective now that the housing legislation has officially passed and all final details are known? Give us your view on the key puts and takes and whether anything is impactful aside from the single-family rental dynamic.
One of the biggest impacts will be on institutional SFR investors. It provides them certainty to operate without a required sale, which is a benefit. We're encouraged by continued focus on affordability and deregulation. The biggest long-term impact would be at the state and local level — municipal and county — where deregulation could create opportunities. We don't expect to see any significant near-term shift in demand or supply from the new legislation.
Got it. Appreciate that. Shifting to the land dynamic, your land acquisition spend has come down alongside the lot count. Can you give your perspective on the land market and how you're managing it? It seems like you're comfortable moving a bit to the sidelines on acquisition or shrinking owned lot count while maintaining control. Thoughts on how that market's evolving?
We're aligning our land acquisition efforts with current market demand. In many markets we've been able to rework lot positions and work with developers. We're pleased with developer partnerships and have restructured some positions. There are still opportunities where it makes sense to secure new positions, but we're buying less raw dirt in recent quarters. We'll probably continue that trend because there are lots in the pipeline, both under our control and available from development partners.
Our focus is to manage land more efficiently and own fewer lots where we can while maintaining control of our starts pace. We have about 1.5 years of owned land today, down from 1.6 years sequentially and 1.7 years year over year. More importantly, we control about 6.7 years. Even with owned lot count coming down a bit, we still control nearly seven years of land overall.
Great. Appreciate that. Thanks.
Thank you. The next question will be from Buck Horne from Raymond James. Buck, your line is live.
Hey, thanks. Good morning. I was wondering if you could go back to the inter-quarter demand trends a little bit, specifically as it relates to the cancellation rate. As demand softened into May and June, was the increase in the cancellation rate back-end loaded, or was it more of a slowdown in incoming gross orders or some combination of both?
It was a bit of both. As we saw softening mid-quarter into the later part of the quarter, our cancellation rate did tick up alongside that. Our operators were adjusting through the quarter.
Even our exit rate for the quarter was still well within our normal historical range.
Got it. What were the largest reasons for cancellations in the quarter? Was it qualification ability or buyer hesitation?
It's still largely qualification as it has historically been. There's a general lack of confidence among buyers; qualification remains the biggest reason for cancellations.
Got it. Thanks, guys. Appreciate it.
Thank you. The next question will be from Kenneth Zehner from Seaport Research. Kenneth, your line is live.
Good morning, everybody.
Morning, Ken.
Morning, Ken.
On the gross margin beat, can you talk to what led to the modest beat you had? Was it regional mix? Also, the newer 30 markets you mentioned — they have higher SG&A, but do they also have higher gross margins?
No, typically a new market wouldn't have higher than normal gross margins. It takes a little while for them to live into both gross margin and SG&A on a per-market basis. New markets would usually be a drag compared to company averages initially.
Mostly the margin beat was driven by our cost reduction efforts, primarily stick and brick savings, which have come through with focus from our operators. There was also a slight reduction in incentives as we adjusted pricing and elected to hold a bit more margin versus leaning into absorption.
Okay. Then you talked about Q4 starts being below Q3. Last year, Q4 starts were about 14,500. Is that the range we should be thinking about? I'm trying to think about your base inventory units and long-term positioning given your historical two-times ending inventory rule, although you're more efficient now and targeting higher turns.
Certainly Q4 starts will be inside Q3. While that's not heroic, it will be more starts than we had in Q4 last year, which was deliberately suppressed to bring inventory back in line. It will depend on sales through the quarter and our September 30th inventory positioning. Historically a two-times turn was the norm; today we're looking in excess of that and our internal goals are to get closer to three times. This year we'll be close.
Really. Okay. Appreciate it. Thank you.
Thank you. The next question will be from Jade Rahmani from KBW. Jade, your line is live.
Thank you very much. Just on the multifamily inventory, given where rates and cap rates are and the supply overhang, what's the outlook for stabilizing and moving that inventory?
We have around $3 billion in rental inventory, largely $2.7 billion in apartments and about $320 million in build-for-rent. Our focus on build-for-rent has been to pursue forward sales; we don't need to grow that much unless we see demand for it. We're looking to hold rental inventory stable around $3 billion.
We do expect to close a few more multifamily units in Q4, so that inventory should come down a bit in Q4. In aggregate we expect to keep the overall rental inventory, multi and single, within the $3 billion range, with some short-term reductions.
Thank you. On the technology side, anything promising in off-site manufacturing or AI? The housing legislation included some manufactured housing incentives; could that be a synergy?
We continue to evaluate opportunities to deliver housing more efficiently, including off-site manufacturing. We're monitoring many players trying to crack the code, but we haven't found a solution that replaces our current processes while being more efficient at scale. We continue to evaluate.
Thank you.
Thank you. The next question will be from Jay McCanless from Citizens. Jay, your line is live.
Good morning, everyone. First question, nice to see the backlog price up year-on-year for the first time in several quarters. Is that just a function of mix, or were you able to find some pricing power in certain markets?
I think that's largely a function of mix. We do have pricing power in some markets and when the opportunity is there, our operators take it at the community level. Also, a slight reduction in incentives, especially rate buydowns, will add back to the revenue column.
Got it. Second question: looking at July, rates moved up aggressively. What have you seen so far on traffic and demand? What are you seeing from competitive inventories, especially on the entry-level and first-time buyer side?
We haven't seen much change in inventories. The industry overall has been relatively disciplined and measuring supply toward demand. It's early in July for us to forecast, and we're responding daily in the field and at point of sale.
Got it. Thank you.
Thank you. The next question will be from Alex Barrón from Housing Research Center. Alex, your line is live.
Yes, thank you. On the single-family rental side, it seems the business has been winding down. Is that the basic idea, or will it come back at some point?
We shifted the business model from developing, stabilizing, and selling entire neighborhoods to delivering units to institutional owners as we complete construction. Those buyers handle lease-up and stabilization. We do site identification, acquisition, and development; they manage lease-up and ownership. It's a more efficient model and we will operate it with a lower inventory balance than historically.
There was a bit of a gap while there was uncertainty about how the legislation would come out. Now that it's clearer, buyers are more comfortable moving forward. We're not winding the business down and could do more depending on investor appetite.
To be clear, it's the same accounting treatment: we're selling completed homes to third parties, not a JV.
On the multifamily side, you still have a lot of assets committed but not many revenues lately. Can you expand on the future outlook?
We expect an increase in multifamily revenues in Q4. There are several projects under contract that are completed or stabilized, so revenues are back-end weighted for fiscal 2026. We have an active pipeline for fiscal 2027 and expect to add to that over time. Revenues have been inconsistent quarter-to-quarter.
Appreciate it. Thank you, guys.
Thanks, Alex.
Thank you.
Thank you. That does conclude today's Q&A session. I will now hand the call over to Paul Romanowski for closing remarks.
Thank you. We appreciate everyone joining us today. We look forward to sharing our fourth quarter and full-year results with you on Thursday, October 29th. To the entire D.R. Horton team, congratulations on a solid third quarter. Thank you for all that you do.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.