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F500-2021-148-D.R.-Horton

The home construction company has been the largest U.S. homebuilder by volume since 2002. (Though rival <a href="https://fortune.com/company/lennar/fortune500/">Lennar</a> bested it in revenue last year.) The company has benefitted in recent quarters as home prices have increased and the supply of homes has been strained. In its fiscal second quarter earnings, announced in April 2021, D.R. Horton reported strong growth. Net income increased 93% to $929.5 million compared to $482.7 million in the same quarter of fiscal 2020.

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D.R. Horton (DHI): Company Profile, Stock Price, News, Rankings

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D.R. Horton

d.r. horton

Good morning, and welcome to the Third Quarter twenty twenty five Earnings Conference Call for D. R. Horton, America's Builder. We'll open the floor for your questions and comments after the presentation. 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 twenty twenty five. Before we get started, today's call includes forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D. 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. O. Horton on the date of this conference call, and D. O. 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 ks 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 Doctor Horton team exceeded our expectations and delivered solid results for the third quarter, highlighted by earnings of $3.36 per diluted share. Our consolidated pre tax income was $1,400,000,000 on $9,200,000,000 of revenues, with a pre tax 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 twelve months, we have generated $2,900,000,000 of cash from operations, and we have returned $4,600,000,000 to shareholders through repurchases and dividends. For the trailing 12 ended June 30, our homebuilding pre tax return on inventory was 22.1%, while our consolidated returns on equity and assets were 16.111.1%. Our return on assets ranks in the top 15% of all S and P 500 companies for the past three, five and ten 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 increase 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 in 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 2025 were $3.36 per diluted share compared to $4.1 per share in the prior year quarter. Net income for the quarter was $1,000,000,000 on consolidated revenues of $9,200,000,000 Our third quarter home sales revenues were $8,600,000,000 on 23,160 homes closed compared to 9,200,000,000 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 $8,400,000,000 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 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 and A expenses increased 2% from last year and homebuilding SG and 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 count 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 and A costs efficiently across our operations. Paul?

We started 24,700 homes in the June, 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 in 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 six months. For homes we closed in the third quarter, our construction cycle times improved several days from the second quarter and approximately two 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 in inventory and starts pace based on market conditions. Mike?

Our homebuilding lot 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 $16,000,000 of inventory impairments and wrote off $36,000,000 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 on 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 $2,200,000,000 of which $1,400,000,000 was for finished lots, $610,000,000 was for land development and $140,000,000 was for land acquisition. Paul?

In the third quarter, our rental operations generated $55,000,000 of pre tax income on $381,000,000 of revenues from the sale of ten sixty five single family rental homes and three twenty eight multifamily rental units. Our rental property inventory at June 30 was $3,100,000,000 which consisted of $2,500,000,000 of multifamily rental properties and $668,000,000 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 $391,000,000 on 3,605 lots sold with pre tax income of $44,000,000 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.

Dollars $320,000,000 of our finished lots purchased in the third quarter were from Forestar. Forestar had $790,000,000 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 essential finished lots to the homebuilding industry and aggregate significant market share. Mike?

Financial Services pre tax income for the third quarter was $81,000,000 on $228,000,000 of revenues, resulting in a pre tax profit margin of 35.7%. During the third quarter, our mortgage company handled the financing for 81% of our home buyers. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of seven twenty 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 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 nine months of the year, homebuilding cash provided by operations was $1,700,000,000 and consolidated cash provided by operations was $950,000,000 At June 30, we had $5,500,000,000 of consolidated liquidity consisting of $2,600,000,000 of cash and $2,900,000,000 of available capacity on our credit facilities. In May, we issued $500,000,000 of homebuilding senior notes due 2030 and in June we increased the capacity of our homebuilding revolving credit facility to $2,300,000,000 Debt at the end of the quarter totaled $7,200,000,000 with $500,000,000 of homebuilding senior notes maturing in the next twelve 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 $24,100,000,000 and book value per share was $80.46 up 7% from a year ago. For the trailing twelve 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 $122,000,000 and our board has declared a quarterly dividend at the same level to be paid in August. We repurchased 9,700,000.0 shares of common stock during the quarter for $1,200,000,000 and our fiscal year to date stock repurchases were $3,600,000,000 which reduced our outstanding share count by 9% from a year ago. Our remaining share repurchase authorization at June 30 was

Looking forward to the fourth quarter, we currently expect to generate consolidated revenues in the range of $9,100,000,000 to $9,600,000,000 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 pre tax profit margin to be in the range of 13.6% to 14.1%. For the full year of fiscal twenty twenty five, we now expect to generate consolidated revenues of approximately $33,700,000,000 to $34,200,000,000 and homes 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 twenty twenty five of approximately 24%. Based on our fiscal year to date share repurchases, strong financial position, and expected operating cash flows of greater than $3,000,000,000 we now plan to repurchase $4,200,000,000 to $4,400,000,000 of our common stock in fiscal twenty twenty five, 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 will continue to adjust 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.

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. Your first question is coming from Alan Ratner from Zelman and Associates. Your line is live.

Hey guys, good morning. Congrats on the really strong results in a challenging market, really impressive. First question, I guess, 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. In terms of competition, 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, you know, as we work through the end of spring and deep into this summer selling season, our incentives have increased some to maintain our pace, which is going to allow us to maintain our guidance at $8,585,005 for the year. So feel good about our position so far in the quarter.

And while starts increased in the second in the quarter, they were basically aligned trailing six months starts and trailing six months 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, 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, looks like the average FICO score of your buyer is down about five 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? Thank you.

We're seeing more of our buyers select an FHA product and we've probably been very heavily incentivizing that FHA product offering at $3.99 by 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.

Thank you. Your next question is coming from John Lovallo from UBS. Your line is live.

Good morning, guys. Thanks for taking my questions. 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? Are you seeing anything change in terms of stick and break or land cost, things of that nature?

Yeah, 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, were seeing the potential for needing to increase incentives through the quarter. As it turned out, was a little more balanced and it didn't impact the closings in 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 our currently our sales and backlog do reflect the 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, it was good to see the share repurchase authorization or the assumption raised from about 4,000,000,000 to 4.2 to 4.4. 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. So we've had the room to be able to devote a bit more capital to 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 still within our target range for our balance sheet.

Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Your line is live.

Yeah, thanks a lot, guys. I just wanna say, I mean, I think that gross margin guide is a lot better than, many had feared. So, we're we're pretty excited about that. I wanna talk about your SG and A, to start off with. You had pretty good, or strong overhead control.

I kind of beat you up about that 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 a kind of a good long term target for SG and A? And then finally on SG and A, I think you had said previously that SG and 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 and A? Thanks.

Sure, Steve. The beat on SG and A is really a function of closings, higher closings volume. Even though our ASP was down, closings did exceed our expectations. In terms of where we expect our SG and 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 and A leverage.

So our SG and 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.

Yeah. I appreciate that, Jessica. I do note though that you're, actually hold on, I'm having some tech issues. I do notice that your closings, while they were a little better than maybe what you thought, 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 and 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 I think we're 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 four star or something in that realm 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 two points, going higher potentially and also your cash flow conversion. Thanks.

Sure. Thanks, Steve. We are in 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 our 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, talked about cash flow yield, 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. The key to maintaining an ROE up closer to that 20% is to have a cash flow yield of north of 10% with strong inventory efficiency.

Great. That's really helpful, Thanks very much.

Thank you. Your next question is coming from Matthew Bouley from Barclays. Your line is live.

Good morning, everyone. Thank you for taking the questions. 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 don't know, you extending out or phasing out communities, anything along those lines to kind of manage some of that supply growth? So yes, just kind of early twenty six expectations and any changes on kind of how you're managing that pace of new community openings? Thank you.

Matthew, 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 four markets out there and you know, that community count tends 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, you know, the progress we've made in the new markets that we've opened, so not concerned about the level of community account 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. Feel good about that, but we do expect to see moderation in community count as we move into '26.

Okay, got it. Thank you for that. And then secondly, your peer this morning spoke about maybe towards the 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 par paraphrasing what they said, but it sounded like then July was a little bit choppy. So just curious kind of what you guys were seeing around sort of the rate volatility and into the holiday and now into the early part of summer, just how are you guys been seeing traffic trends these past few weeks? Thank you.

Really, 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, you know, 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 seems to be doing okay as far as driving traffic and the incremental sales we need.

Got it. Alright. Thanks, Paul. Good luck, guys.

Thank you. Your next question is coming from Sam Reid from Wells Fargo. Your line is live.

Awesome. Thanks so much. 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 in 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. I'm curious if you've had to respond to that.

We've seen, always had a long term very good relationship with the brokerage community and I think we are still north of 80% with our broker attachment rates for our 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 that 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 two seventy basis points of impact if you wanted to look at apples to apples gross margin or SG and A versus other builders that record it 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 fourth quarter gross margin guide? Earlier in the call, 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? Thanks.

Yeah, the three ninety nine rate 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. You know, 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. You know, 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 one to one and a half points below market pretty consistently. Last quarter, we were pretty transparent about we were probably closer to the one and a half on average, which is what the just over 5% Paul mentioned would incorporate.

Very helpful. Thanks so much. I'll pass it on.

Thank you. Your next question is coming from Eric Bosshard from Cleveland Research. Your line is live.

Good morning. 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 one 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% 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 quarter.

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 that smaller products been well received in the market and the utility it's providing for the buyers.

Thank you. Your next question is coming from Trevor Allinson from Wolfe Research. Your line is live.

Hi, good morning. Thank you for taking my questions. First one is just on your completed and age 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 twenty six.

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 for new homes. At the same time, we've seen a pretty notable rise in resale inventory since really the middle of last year coincided with some overall demand weakness. So are you seeing more competition there from resale inventory?

And if so, could you rank where that stands in terms of headwinds in context of affordability and sentiment issues? Thanks.

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 resale 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 home buyers to come look at new home construction. First time home buyers look at new home construction.

Thank you for all the color and good luck moving forward.

Thank you. Your next question is coming from Raffi Jadrosich from Bank of America. Your line is live.

Hi, good morning. It's Raffi. Thanks for taking my questions. 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 two in those markets. Those are 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 and 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.

Thank you. And then in terms of the land cost impact, I think the last couple of quarters, was some lot cost pressure from mix. In this quarter, was a tailwind. If we were to sort of normalize for that, what are you seeing for sort of underlying lot cost 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 costs. I mean, it's kind of a flow of inventory that's going through there. So the homes we close over the next twelve months are pretty much on lots that are identified, costed and largely owned by us today. Going forward, we continue to see a little bit of softness or changes in the marketplace and that results in changes in land and development costs, expect to see relief from that inflation going forward, but that would be several quarters out before any of that inventory came into production and closings.

Thank you. Your next question is coming from Michael Rehaut from JP Morgan. Morgan. Your line is live.

Great. Thanks for taking my questions. Appreciate it. First, I just wanted to circle back and make sure fully appreciated or understood the trends around incentives during the quarter and how they progress year to date and how you're thinking about them in the back in the next quarter or two. One of your competitors this morning talked about incentives now up each for the last two quarters 70 to 80 bps on average sequentially each of the last two quarters.

D.R. Horton Q3 2025 Earnings Call Transcript | Fortune

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D.R. Horton (DHI) Q3 2025 Earnings Call Transcript

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