D.R. Horton, Inc. Presents at UBS Global Industrials and Transportation Conference 2022, Jun-07-2022 09 - 40 AM

D.R. Horton, Inc.
NYSE:DHI
Company Conference
Presentation
Tuesday, June 07, 2022 2:40 PM GMT
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Contents
Table of Contents
Call Participants .................................................................................. 3
Presentation .................................................................................. 4
Question and Answer .................................................................................. 5
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D.R. HORTON, INC. COMPANY CONFERENCE PRESENTATION | JUN 07, 2022
Call Participants
EXECUTIVES
Bill W. Wheat
Executive VP & CFO
Jessica Hansen
Vice President of Investor
Relations
ANALYSTS
John Lovallo
UBS Investment Bank, Research
Division
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Presentation
John Lovallo
UBS Investment Bank, Research Division
Okay. Thank you, everyone, for joining us. I'm John Lovallo. I'm the senior U.S. homebuilding and building
products analyst here at UBS. We are delighted to have D.R. Horton with us today. We have Bill Wheat,
EVP and CFO. And to my left here, Jessica Hansen, who's VP of IR and Communications. Thank you, guys,
very much for joining us. As always, we appreciate it.
Bill W. Wheat
Executive VP & CFO
Thanks, John. Thanks for having us. Pleasure.
Question and Answer

John Lovallo
Maybe we'll start just sort of at a high level. Let's think about the big kind of question out there being
affordability and what's happening with the consumer in that regard. I mean are you seeing more of a
gravitation towards smaller footprints or anything that might be an early indication that people are getting
a little bit stretched?
Bill W. Wheat
Executive VP & CFO
We've actually seen that trend towards slightly smaller houses over the last couple of years. Our average
square footage just in the mix of the homes we've been selling has been ticking down ever so slightly. I
believe last quarter, it moved down another 1%.
And so that's a trend we typically see whenever we are experiencing significant price appreciation, which
we have over the last couple of years. And then, of course, more recently, as mortgage rates have risen,
that is one more factor in affordability that affects the buyers' choices. And so it's very common to see a
slight move down in our average square footage.
John Lovallo
Okay. That makes sense. And maybe sticking on home price appreciation. I mean it's been pretty wild
out there for the past couple of years. Any thoughts on what's going to happen this year? Any particular
markets that you're seeing either acceleration or deceleration?
Bill W. Wheat
Executive VP & CFO
I think, clearly, given the cumulative appreciation we've seen over the last couple of years, our base case
is that appreciation in home prices will moderate. And I believe by the end of '22 and into '23 could very
well flatten.
We've seen unprecedented appreciation driven by some very strong demand -- strong demographic
drivers behind demand and then, more recently, very really severe supply constraints, very limited
inventory in the existing home market as well as in the new home market, with construction times
lengthening due to supply chain challenges. And so that's driven really a higher-than-normal level of
appreciation.
So I think it's natural now, especially in a period with a bit higher rates, that pricing will moderate, settle
in, and we'll see what the next phase of the process here is, but pricing should moderate.
John Lovallo
It's probably a good thing.
Bill W. Wheat
Executive VP & CFO
Absolutely. Yes. We actually look forward to that. I believe the market does need to cool off just a bit to
settle into the new environment, the new rate environment and the post-pandemic environment.
John Lovallo
Got it. Makes sense. And then you mentioned cycle times, Bill. If we think about -- let's just maybe talk
from an industry standpoint. Are you seeing further extensions in the industry cycle times? Or are things
starting to flatten out? How would you kind of characterize it?
Bill W. Wheat
Executive VP & CFO
We have not yet seen stabilization or any improvement in our cycle times as of yet. There -- we have seen
some progress on certain issues in the supply chain. But every time we solve one issue, it seems like a
new issue arises.
So as of yet, on the homes we're closing, our construction times are still slightly lengthening. And I think
we'll still see that for another quarter or so. We believe we are at a period where we should start to see
some stabilization over the next couple of quarters.
And then we're hopeful that in 2023, we can start to see some improvement. But it's been a long process
and a little bit frustrating that there have been so many challenges, but I think we're nearing the point
where we should see some stabilization.
John Lovallo
Okay. That's encouraging. All right. So let's talk about sort of the big elephant in the room. Stock market
is telling us one thing that cycle's over and perhaps even worse that we're heading for a pretty big
slowdown. Executives that we speak with, including you guys, including us, are bullish. Where is the
disconnect? What's being missed in your mind?
Jessica Hansen
Vice President of Investor Relations
I think that it's always different. So I hate saying it's different this time, but it is for numerous reasons.
And so we don't have a crystal ball. We don't know exactly how this is going to play out. Obviously, the
Street does not like uncertainty. So we know that's a struggle.
Any time rates are rising, that tends to be a struggle for the stocks. But the supply/demand imbalance, I
think, is what continues to be underappreciated. And we would have typically already seen a cooling off in
demand with this kind of move in rates.
I think you are starting to now hear about it. But even if you go back to late calendar '18, I mean, rates
rose about 100 basis points in, what, 45 or 60 days, and we saw a dramatic falloff in demand. This time,
rates moved 200 basis points in a shorter period of time, and we didn't see that immediate fall off.
And I think there's just been so many buyers out there that haven't been able to get into a new home. So
we don't expect it to stay frenzied like it had been, but we do think there could be a much softer landing
this time, especially if rates here -- they seem to maybe have stabilized, but we'll wait and see.
The industry as a whole, though, balance sheets, liquidity, everything is in a much better position. I think
we led the this in terms of deleveraging and also shifting more of our demand, control the balance sheet
and have a very strong position in that regard to have [indiscernible] whatever happens. But I think that's
true to the industry as a whole.
John Lovallo
Yes. It's a really interesting point to make about the supply/demand imbalance that is an issue for the
past [indiscernible]. That's obviously when [indiscernible] an interesting point that there's been so many
people price [indiscernible] bidding on homes. So it almost feels like there's a layer of demand that if
things did settle in terms of pricing or whatever the case may be, it seems another layer come in.
Bill W. Wheat
Executive VP & CFO
I think that's one of the reasons why we did not see the immediate drop off in demand when rate rose.
There were so many people who have been in the market still wanted to buy a home. They're still there.
And to the extent that they're in financial conditions, you'll be able to afford a higher payment even with
higher rates. I think they're still wanting to buy their homes.
We do believe there is a good fundamental level of demand. And if you look at the demographics of the
millennial generation, the generation behind them, there should be a good strong household formation
process over the next few years as well, but should continue to drive a good level of demand.
And with very limited supply in both the existing home market and in the new home market, the
conditions for a major correction are just not there. There certainly can be moderation in demand. There
may be flattening in price. There could be actually some reduction in the average home price, especially as
buyers choose smaller homes overall.
But it's very hard to imagine a scenario where the market becomes oversupplied. And when we're
oversupplied, that's when there would be a more significant correction.
John Lovallo
Yes. I completely agree with that. That makes a tremendous amount of sense. And if that being the case, I
mean, you could certainly argue and we are arguing that earnings can remain elevated for a period of time
here at least.
Jessica Hansen
And even if you haircut earnings, dramatically, the stocks have already priced in something even worse
than that.
John Lovallo
Actually, you cut your earnings in half next year, you should be trading at 8.5x, whatever. Okay. That
makes sense. How about in terms of metering sales, I know you guys have had to do that quite a bit.
I mean are you seeing any change in that? Or are you able to kind of back off of the metering in any
communities? Or is it still pretty...
Bill W. Wheat
Executive VP & CFO
Community by community, market by market, we do make adjustments to that. But today, we are still
metering sales. We are still -- we are not preselling any homes. All of the sales orders that we are signing
up with customers are on spec homes where construction has already begun.
And so the construction stage may vary on when we're willing to sign a sales contract, but it is still on
a home that has already been started. So we're still metering those sales. And we have a little bit of an
update to the market in terms of our commentary on sales orders.
We did not guide specifically to sales orders in our Q3 for our upcoming June quarter, quarter we're in, but
we did talk about on our earnings call that we only really need to sell 16,000 to 18,000 homes to fill out
our backlog to complete our closings guidance for the year of 88,000 to 90,000 homes.
And so with that sales volume of only 16,000 to 18,000, our sales order pace for our June quarter, we
would expect to be roughly flat with our -- with the prior year quarter because we are still having the
meter sales, and we're not in a position yet, but we've seen supply chain improvement to expand that
sales pace. And so just as a bit of an update on the sales order metric. That is our expectation for a June
quarter.
John Lovallo
Okay. That makes perfect sense. So if we think about the sales metering and the impact that could have
going forward, I mean, you guys have talked about consistently growing double digits. I mean does this
negatively impact that to some extent?
Jessica Hansen
Not that. And really, our positioning is generally always to grow, but it's really going to be dependent on
market conditions. So as we go into each year, if the overall market isn't going to grow, we would expect
to still grow.
It may not be at a double-digit pace if the market is flat or slightly down, but we're positioned to continue
to consolidate share, especially with our price point and the fact that even with our home prices having
risen dramatically, we're still significantly lower on average than the rest of the public's.
And so with our strong flexible financial position and our spec business model, we think regardless of
market conditions, we will continue to consolidate share. May not be at a double-digit pace if the overall
market is not there to support it. But if it looks like it will be, we'll make sure we're positioned to go get
that.
John Lovallo
Makes sense. When we think about your average consumer because I think this is one thing that may be
missed as well, they're fairly well healed financially. And still, I think you quoted at one point, Jessica,
$75,000 to $80,000 is the average income of your buyer. And FICO scores have been incredibly strong. So
it does sort of feel like the balance sheets of the consumer are in reasonably good shape.
Jessica Hansen
Yes. And with the increase in home prices, we actually have seen that tick up a little bit. The average
income, just obviously, they have to, to now qualify. So whereas we were probably $75,000 to $80,000
combined household income, it's probably closer to $80,000 to $90,000 on average today. And as you
mentioned, strong FICO scores, we've been in the [ 700 teens ] to 720 range very consistently.
John Lovallo
Okay. There's, I think, an expectation -- we certainly believe it will happen that over time, margins are
going to kind of trend down a bit from 29% to 30% where they are today. What's the case that you guys
make for margins -- gross margins to remain, call it, mid-20%? I mean can that persist for a few more
years?
Bill W. Wheat
Executive VP & CFO
We believe it can. Gross margins are really a reflection of the strength of the housing market, and it's a
reflection of the supply and demand balance in the market. So if the scenario that we've been discussing
here where there's still a good underlying level of demand, and if we settle into some stability with rates
so that there is some predictability to where payments are going to be, and I think especially if we see
some moderation in price appreciation, we will definitely see some pressure on margins.
We're at all-time high gross margins today in the high 20s. And so I think there's some moderation there.
But with -- in a very still limited supply environment with good demand, I think the mid-20s is definitely
possible. It's still going to be a reflection of the strength of the market.
As far as the position of the company with the scale that we've achieved, with the cost advantages, with
the low leverage and lower interest costs that we have coming through, there are definitely some built-
in advantages in our cost structure that should allow us to stay a bit higher than perhaps our longer-term
historic gross margin average.
John Lovallo
On a trend basis?
Bill W. Wheat
Executive VP & CFO
On a trend basis, yes.
John Lovallo
Okay. Makes perfect sense. And if we think about today's environment being how tight it is on the supply
side, there's a shortage of finished lots and just a tough operating environment, if we think about Forestar
and your investment there, how important is that, do you believe, to your continued success?
Bill W. Wheat
Executive VP & CFO
Forestar is a key part of our overall strategy. We have been on a journey really the last 10-plus years of
improving the capital efficiency in our land pipeline, and we've increased the portion of our pipeline that is
in options. 77% of our pipeline is on options today.
We would not be there if we did not have the relationship with Forestar. So just for those of you that
don't know, roughly 5 years ago, we took a majority stake, a 75% stake in Forestar, which is a public lot
development company.
And we have worked alongside them for them to grow their platform to become really what did not exist
in the market, a national lot developer. And so today, they are in 50-plus markets. They are now delivering
roughly 20% of the lots that we're building homes on. And they have access to the public capital markets
and have raised their own debt and equity capital to grow their balance sheet, and they're in a great
position doing something that no one's ever done before, becoming a national developer.
And so from the standpoint of having that relationship across all of our markets puts us in a unique
position relative to the industry in order to have a consistent lot supply coming to us. And I believe
Forestar, as they expand their business across the industry, has a unique opportunity as well to be an
important supplier to the industry.
John Lovallo
How replicable do you think that, that model is for Forestar? I mean how important is it that it's a public
company?
Bill W. Wheat
Executive VP & CFO
Yes. I think the access to public capital is very important. To be able to have a long-term fixed rate senior
note available provides consistency of capital through cycles. Having a -- an unsecured bank credit facility
with those -- gives them substantial liquidity.
And so Forestar is focused on keeping a strong balance sheet, less than 40% leverage, strong liquidity
profile, which puts them in a unique position relative to other lot developers, which are typically much
more constrained from a capital standpoint, constrained from a geographic presence as well. So I think
they're in a unique position to continue to consolidate on the lot development side.
John Lovallo
Makes sense. And I think another debate that's out in the market today, is it better to be the higher end
selling expensive homes or sort of the lower end, servicing the first-time entry-level buyer. And there's a
lot of reasons why you could kind of argue in both directions. What would be your case for being on the
lower end?
Jessica Hansen
Yes. We've generally always been focused, first and foremost, on the entry-level, first-time, first-time
move-up buyer. The lower your price point, the more people that can afford your home. So it's generally
the most stable piece of the market. And we think about entry-level buyers is buying out of need. Whereas
the further up the price curve you go, a move-up buyer is much more of a discretionary purchase.
There are also, in a lot of cases, maybe a little bit more financially savvy and actually care about the
absolute interest rate. Whereas an entry-level buyer is just looking at a monthly payment, what can they
rent for, what can they buy for? And rents have continued to rise. And rent versus buy is still generally an
attractive equation.
And if you -- even with rates having moved to the low 5's today, if you've got your last couple of rent
increase notices, they've probably been in excess of that. So you're still able to lock in a 30-year fixed
rate note at that low 5% rate. So we continue to really prefer our focus, and that has been the bread and
butter of our business for years.
And I always throw the first time move-up buyer in there as well as a buyer out of need because typically,
after a first home, if you're expanding the size of your family, you've outgrown that starter house, and you
need that next house.
John Lovallo
That's a really interesting point. That makes a lot of sense. Most people would think of just kind of the
first-time buyer. Okay. Makes sense. Let's move on to -- the portfolio has changed over the years. You
guys are now investing very successfully in single-family rental, things of that nature.
Let's talk about where you see the opportunity for single-family rental. One of the questions that we get a
lot is that there seems to be a fair amount of capital chasing this market. And do you see any risks that go
along with that?
Bill W. Wheat
Executive VP & CFO
Yes. I think there are some unknowns and some uncertainty around the single-family rental market.
The -- what -- it is a newer, I guess, institutional asset class. And it's now a product that is more widely
available to consumers, to families than it has been before. It clearly has a place -- it's meeting a need
for families that are looking for the single-family lifestyle, a little more space, a little more privacy, but not
quite ready to buy.
So I think it's meeting a need there. How much of the market it will ultimately garner, I think, remains to
be seen. So that's where clearly there's some uncertainty. But at the same time, clearly, there's a lot of
opportunity. So there is a lot of institutional capital looking at the space, chasing the space.
However, the capacity to actually provide product is still very limited. And I think that's where the
opportunity we see for D.R. Horton is we have the largest production capacity in the industry as the
largest for sale builder. We think we're in a unique position to be a provider of housing to the single-family
rental segment.
We also started a multifamily rental segment several years ago as well. So we are really, from Horton's
perspective, see this as a great opportunity to significantly expand the addressable market for our
company. As a provider of housing, largest provider for sale housing, we believe we'll be the largest
provider, producer, construction company of both multifamily and single-family housing in the coming
years as well. And so that -- both of those asset classes have a place in the marketplace.
I believe the single-family rental is becoming more institutionalized as well. And we believe our role as a
construction company, providing that product, we're in a unique position to do that.
John Lovallo
That makes sense. You bring up an interesting point, Bill, that just there's a lot of interest in capital ready
to invest in this space, but a limited amount of actual capacity to build these homes. Have you heard
anything about nontraditional buyers getting more interested in actually buying a home builder?
Bill W. Wheat
Executive VP & CFO
I can't say that we've -- it would make perfect sense for that to be the case. I can't say that we have
heard anything specific along those lines. But clearly, you have capital that is looking for capacity to
produce. And there are a lot of builders out there that probably -- it could be an opportunity for them to
align with that. But I haven't heard necessarily anything specific. It would certainly make sense, I would
think, in certain circumstances.
John Lovallo
Okay. And then talking about how the business has evolved over time, one of the things that I think is
incredibly powerful is the fact that you guys are generating positive free cash flow through a cycle. And
historically, when things were really good like this, we would see negative cash flow as a lot was going
back in land.
Let's talk about your strategy for capital allocation. How is it different? Can this -- do you think the
discipline for the industry will remain in place where -- be cash flow positive through a cycle?
Bill W. Wheat
Executive VP & CFO
Yes. I think the industry is already showing that. At D.R. Horton, it was a big focus of ours, we weren't
really going back 10-plus years to improve the capital efficiency of our business. So it started with our
land pipeline, increasing the level of options in our land pipeline.
We own only 1.5 years of lots today. That's the tightest owned lot supply we've ever had. That put us in
a position to be able to grow with a more capital-efficient land pipeline and generate cash flow even as
we've grown all the way through the cycle.
Other builders have adopted at least portions of that strategy and are at different stages of the journey,
but really the industry as a whole is operating more capital efficiency -- efficiently than historically and is
generating more cash flow than ever.
And in a period where volumes may moderate a bit, typically, a builder will generate even more cash flow
if the reinvestment levels are not quite as quite as heavy. So I think that puts the industry in a very good
position going into perhaps a little bit of a period of uncertainty. With stronger balance sheet, stronger
liquidity and a cash flow profile that, I think that allows for a lot of flexibility for us and for, really, the large
-- other large publics.
John Lovallo
Yes, I agree. And with that cash flow profile, you guys have certainly done more in terms of buying back
stock and things of that nature, is there an opportunity given where the stock is trading today to -- or
there's an opportunity, but would you guys consider pivoting more towards buybacks?
Bill W. Wheat
Executive VP & CFO
I would say we have been. We really historically had not been a significant repurchaser of our shares. We
implemented a share repurchase program over the last several years that we have consistently executed
on, have consistently increased it. And we've consistently increased the reduction of our share count that
we're targeting.
And so it is an increasing part of our capital allocation plan. We do have some flexibility within that plan
to make some pivots. And in a period where perhaps we might not invest quite as much in land, that
does allow some additional capital that could be applied there. But it won't -- I don't believe that we will
abandon any of our priorities for one priority. So it will all be within a range, within our overall balanced
capital allocation plan.
John Lovallo
Okay. Yes. Makes sense. And we talked about getting the options to 77%, which is, I mean, wild
considering where it came from, right? And what's the right number? It's a silly question, but is there a
right number?
Jessica Hansen
We've really focused on our owned lot count and trying to manage that. So there isn't a magic number
on the option piece. We'll tie up anything if it makes sense for the low earnest money deposits that we're
getting. Our total owned and controlled count today is up to 574,000 lots, which is a 7-year supply on our
trailing 12-month closings, but the owned portion of that is only about 1.5 years.
And so we're focused on continuing to as efficiently manage that as possible. And so we could continue to
trend that down assuming we continue to have success on the options. And agree with you while that our
operators have been able to be that successful and grow our option lot position as fast as they have, we
wouldn't have expected to be at 77% this soon.
But we do have plans to continue to -- we talk about grinding it higher. It's not going to spike overnight,
but we do think we can continually gradually hedge that a little bit higher than where it currently is today.
John Lovallo
Okay. There's a couple of questions here from the audience. How is your growth in the U.S. Northeast,
your health relating to the urban market?
Bill W. Wheat
Executive VP & CFO
I wouldn't say we're an urban builder. We're more of a suburban builder. And we're focused on affordability
and single-family, townhome communities. We have been focused on the Northeast, though. And so
over the last several years, if you look at our segment disclosures, you'll see that we have increased
our investment levels in what we call our North region publicly. But in the Northeast, it's really state of
Virginia, [ northward ]. And so our investments have increased.
You're seeing our revenues and profits begin to increase. We are gaining share in basically all of the
markets in that area. And it has been a focus for us. Our teams have strengthened quite a bit over the last
several years, and we feel good about the opportunities in these markets.
There are certainly different markets than the Sunbelt markets that are kind of our bread and butter, but
we believe there's an opportunity really across our footprint, across the U.S. to the extent that we can
provide affordable housing. We're providing homes at price points that most other builders cannot. And so
there is definitely a place in these markets for us.
John Lovallo
Okay. The next question is, is the bigger challenge supply issues, which I assume are materials or labor
shortages?
Jessica Hansen
It's materials for us. I mean you may get slightly different answers from builders. I mean there's certainly
not an excess supply of finished lots out there, which is the first input you need to be able to start
construction. We're very well positioned in that regard.
Materials have continued to be the issue. I think as Bill mentioned earlier, we put one fire out, but then
another thing becomes an issue. So it's pretty broad-based at this point.
It exacerbates an already tight labor supply. So if you can't get the materials delivered when you expect it,
it makes it pretty hard to schedule and deliver. But we have really strong labor trade relationships, and our
scale benefits us in a lot of ways. So we would definitely say it's materials today versus labor. And that is
the main culprit of our lengthening build times.
John Lovallo
Okay. Unfair question, but do you think that that's the case for the industry? Or do you think that the
smaller folks -- players in your regions are struggling more with labor versus materials or hard to say?
Jessica Hansen
Yes. Hard to rank order for them, but I would imagine you'd hear all 3. I think you'd hear finished lots
aren't adequately dispersed where builders need them and whether it's smaller guys or some of the other
small and mid-tier publics and definitely labor.
I mean I think we -- with our dominant scale in a lot of the local markets we operate in, we really do
control the trade base. And so we expect those crews to be on our job sites even if it's at the expense of
another smaller guy.
John Lovallo
Yes. Makes sense. And then maybe just sticking with the challenges of getting land ready to build upon.
If we think about the entitlement and the development process, are we seeing any easing back to sort of
pre-COVID levels? Or is this still an incredible challenge?
Bill W. Wheat
Executive VP & CFO
I'm not sure at any point in our history we've ever seen that get better. It always finds a way to get just a
little bit tougher. And so it definitely did in certain markets during COVID. While there are probably more
new municipalities where staff is back in the office, perhaps maybe a bit more available, there's such a
backlog and still such a need for new projects that they do still struggle with the volume.
Seems like the municipalities never quite catch up. So the entitlement process, the time it takes to work
those just continues to get longer. So we just focus on making sure we have the right resources, the right
people and the right relationships there to work through it as best as we can.
John Lovallo
Yes. Makes sense. One of the other concerns that we hear out there, and we talked about how builders in
general have been more efficient with capital -- arguably, better stewards of capital. One of the concerns
is that folks are going to overpay for land and maybe have even started to do so. Have you seen any
irrational behavior in any of your markets that would be notable?
Bill W. Wheat
Executive VP & CFO
I wouldn't say anything significant or on a broad basis. There's always anecdotes in an individual market
where a builder may have has gotten a little bit short on lots. And so reach is a little further on one deal
where we're -- that we wouldn't underwrite to that level, but perhaps it makes sense for them if they're a
little bit short.
I would say the only general commentary around that where people talk about somebody overpaying for
land has probably been more from the single-family rental operators. We've been looking for properties.
And there is, as we've already mentioned, a lot of capital chasing that.
There is a different underwriting for single-family rental because, ultimately, that product is going to a
different buyer. It's a buyer looking for an income stream. It's not a family stretching to qualify for a
mortgage for their home. And so you can certainly underwrite to a higher valuation on land for single-
family rental.
But -- so there have been some deals where that I think we would see a higher price there. But again,
broad-based to a significant level across all our markets, no. I wouldn't say there's really been any rational
behavior.
John Lovallo
Okay. That's encouraging. And on the single-family rental side, are you seeing -- is there a real -- put
it this way, is there a chance that -- because there is capital chasing this market and not all of it is solid
institutional money, just kind of some onesies and twosies that maybe own one home here or 2 homes
there. Is there any risk that if they're not paying the right price, there could be inventory that floods the
market at some point if they just can't -- they just haven't underwritten it properly?
Jessica Hansen
If there's too much of that. It's really hard to quantify and know how much of that there is. I mean it's
been well publicized on the institutional part, and I think we agree with you that's not nearly as risky
because that's more longer-term money.
We've been this entire cycle trying to limit investor sales. So it doesn't mean we don't have the one-
off mom-and-pop that will buy 1 or 2 houses. But generally speaking, we're limiting that. And I think in
the conversations I've heard anecdotally from other builders, most builders have been trying to do that
outside of maybe one that have no limits.
So that's a positive that the builders have tried to limit it, but I do think it's a little bit of an unknown of
how much there truly is of that in the market. It can't be as much as '05 and '06, right, when it was credit
bubble, free money, no underwriting. At least those guys who are buying today are having to put skin in
the game. They're still having to qualify for the mortgage or they're 100% cash buyers.
John Lovallo
Yes. And I think part of the problem in '05, '06 was people were refinancing with these teaser rates taken
money out of their home and probably buying another home and just leveraging to...
Jessica Hansen
Yes. And I don't think home equity lines of credit have come back to any -- big way. And so a lot of those
things that got them into trouble last time don't exist.
Bill W. Wheat
Executive VP & CFO
They were buying those investment homes with mortgages today, it's primarily a cash buyer.
Jessica Hansen
Yes.
Bill W. Wheat
Executive VP & CFO
So I think the capital should be a bit more patient. Typically, they're renting those homes. And so they're
either renting in their own portfolio or renting it for the cash flow.
John Lovallo
And so -- and that's another difference, right, is the cash flow that they're looking for today versus flipping
what we saw during the crisis.
Bill W. Wheat
Executive VP & CFO
Right.
John Lovallo
Okay. Let's talk about just mortgages for a minute. Have you seen any gravitation away from the 30-year
fixed across your conversations in the industry?
Jessica Hansen
Not for our buyers. That'd probably be more of a toll question, I imagine. We generally see 30-year fixed
across the board. We've been heavier conventional than we typically would. So I think what we would
expect to see as we move throughout this year and if affordability continues to become more of an issue is
more FHA usage because we're a little low compared to some levels we've run of FHA prior.
We did have a handful of ARM transactions this quarter, up from 0 a year ago, but it was literally, I think,
less than 50 loans out of everything our mortgage company underwrote.
John Lovallo
Okay. So it is something -- it is a product that you guys will offer for consumer.
Jessica Hansen
Yes.
John Lovallo
Okay. And if we think about the rates on -- the current rates on that part of the portfolio is, call it, a 7-
year ARM, I've heard that we're still kind of in the sub-4% range. I mean are you seeing anything like
that?
Bill W. Wheat
Executive VP & CFO
Yes. I believe that's about where the market is today on that. Again, we're not a big sample size for that.
John Lovallo
Yes. All right. Let's move on to the -- just -- to the portfolio again. If we think about your Express brand,
which clearly gets a lot of attention and rightly so. It's about 30% of the business. What's the right level
for that? I mean where do you kind of see it going over the next 5 years, let's say?
Bill W. Wheat
Executive VP & CFO
Yes. I think it's settled into, I believe, where the stable level is, in that 30% to mid-30% range. And that's
truly our entry-level buyer at -- just trying to hit a payment. It's our first level of buyer coming out of a
rental situation. As we've evolved over time, the lower price points in our Horton brand are very similar to
Express.
They may have a little bit more in the house, a little bit higher price point, but still a lot -- a few options,
limited floor plans, very consistent offering there. And so I believe we do get some entry-level buyers,
some first-time buyers in the lower price points in our Horton brand as well.
So as we've already talked about, our bread and butter is really that entry-level first-time buyer -- first-
time move-up buyer. And I believe both Express and the lower price points in our Horton brand clearly are
focused on that buyer segment.
Jessica Hansen
Yes. We were 55% roughly first-time homebuyers this most recent quarter. And it's been interesting
because we really have differentiated this cycle between entry level and first time. There's a lot of
millennials and -- buyers that have waited a little bit later in life to buy a home.
And so they're not necessarily a true entry-level buyer. They're buying a little bit higher priced home
because they've waited longer, and their financial profile is a little bit different.
John Lovallo
Okay. Makes sense. That just -- let me think -- if we -- what is your ability to -- let's say a buyer comes in,
they are looking at maybe a mid-priced Horton home or even something higher -- rates go up, prices go
up, it becomes more challenging. What is your success rate in sort of gravitating them into a different type
of home?
Jessica Hansen
I'd say it's usually pretty good. A lot of times, it just takes some time. Anytime you see -- if a buyer
thought they could afford x amount of home, and now it's why? Well, they don't necessarily get their
overnight that they're comfortable with that, but they still need a place to live. And if they need a house,
once they have the time to kind of adjust their expectations on what they can now afford, they're going to
just buy a little bit smaller home.
Bill W. Wheat
Executive VP & CFO
Yes. That's really been one of the keys with us, metering sales and really holding sales a bit until later in
construction is it shortens that time from the time they signed the sales contract to when the home can be
complete.
And to the extent that, that's within 90 days or so, we're typically able to go ahead and have them lock
their mortgage rate. And to the extent that they can lock their mortgage rate, then the certainty of that
buyer being able to close and not having to adjust their expectations really increases. So that's been a
focus of ours, especially since rates started moving up.
John Lovallo
Okay. So that's a lever that can be pulled. If we think about the consumer, again, looking for affordability,
there's also the lever of moving a little further out than they would have perhaps -- if the economics were
differently or different. How much of that are you seeing if you can quantify that?
And because we always hear COVID has changed the way people think, and we do believe that to be true,
but allows them not to be in the office 5 days a week and perhaps a little further. Does that feel real to
you guys?
Jessica Hansen
I think so.
Bill W. Wheat
Executive VP & CFO
Yes.
Jessica Hansen
And we were probably already the best positioned, right? With our focus on affordability, we would have
some of those communities that were already a little bit further out than maybe some of the higher priced
publics that we compete with. And so I think that certainly was an advantage for us, especially in the early
days of the pandemic where we had completed specs that were ready for quick movement. It's all about
the trade-off of the affordability versus the drive.
But the other big driver for us is just good quality public schools. And generally, once people have children
that are entering that school age -- not everyone can afford to live in a higher price, closer in-house and
pay for their children to go to private school. So if they're able to handle whatever that commute looks
like, they can get a good quality public school and more home for their money.
I think the other thing that's changed this cycle that wasn't true last cycle is where employers have
relocated to, right? I mean people look at our footprint in Dallas/Fort Worth. We talk about it a lot because
it's our home base. But you look at all of our communities in Dallas, and people will go, "Wow, that is a
long ways from downtown Dallas. Nobody is going to make that commute."
That's not really where all the job growth has been. The job growth has been in the Northern Corridor
where McKinney, Plano, Frisco, all these places that have become big cities in their own right. And so if
we're a little bit of a drive from those -- maybe you have one spouse that commutes in 20 minutes to
those city, and then the other spouse is a firefighter, a school teacher in that market we actually build in.
And I think that's happening all across the U.S. because employers want their people to be able to have a
good quality of life.
John Lovallo
Okay. That makes perfect sense. And so that sort of migration that we're seeing from higher-cost areas
into lower-cost areas, I would imagine, is another lever that you're seeing folks on the affordability front.
Bill W. Wheat
Executive VP & CFO
Yes. I think that's a trend we'll continue to see. The trend was in place pre-COVID. I think it accelerated
during COVID. We may see some normalization of it, some moderation of that pace. But that is a long-
term trend that I think will continue to -- people want to have a good quality of life and to the extent that
an area is more affordable than another, and they can still today either work remote or there's great jobs
in those markets in their own right, I think that's a trend that definitely supports continued growth really
across the Sunbelt in the lower-cost areas.
Jessica Hansen
We still had 15% of the buyers that utilized our mortgage company this most recent quarter. We're
actually buying and moving from one state to another state. And it was actually slightly up from a year
ago, which I found a little interesting.
John Lovallo
That is interesting. Okay. Another kind of debate that's out there that we hear is with the single-family and
the multifamily rental business. Some folks say, well, that's a great hedge against the new construction
market. Other folks would say, well, it's Horton moving too far away from their core. How do you guys
kind of think about that?
Bill W. Wheat
Executive VP & CFO
Yes. I think we look at it -- as I mentioned a little bit earlier, this is an opportunity for us to just expand
the addressable market. Our single-family for sale business will continue to be the foundation of our
business, will continue to be the majority of our business, but we do feel like we have a great opportunity
to build a significant new portion of the platform to support the rental market. It's got its place in the
market. And I think we're uniquely positioned to take advantage of it. So it's not taking attention away
from our for-sale business.
There is an element of a hedge. There certainly is flexibility that it provides you to have the ability to
make a community either for sale or for rent. We do try to make that decision upfront and build our rental
communities on purpose as a for rent intentionally built community because it makes it a more attractive
asset to the investors who are purchasing it and if we built it from the beginning with it being a rental
community in mind. So that is our strategy.
But that being said, if there were changes in the market that might change our decision, we do have the
flexibility to change a community one way or the other for sale or for rent. So it provides more flexibility,
certainly increases our platform. And the rental segment for us is going to be a significant contributor to
our future earnings in the next few years.
John Lovallo
Does that switch from a rental to for sale or vice versa, is that -- does that require different zoning? Or is
that...
Bill W. Wheat
Executive VP & CFO
It depends. In some cases, yes. And in some cases, the zoning is flexible and allows for that. It's
something you want to be planful for and make sure that we're very intentional about ensuring that
everything is set for you to get into the process.
John Lovallo
Okay. We are exactly out of time right now. I could have kept going. But thank you guys very much. This
has been great.
Jessica Hansen

Thanks, John.
Bill W. Wheat
Executive VP & CFO
Thank you, John. Thanks to UBS for hosting us. Thank you all for your time.
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