D.R. Horton Inc. (DHI) Q3 2020 Earnings Call Transcript

D.R. Horton Inc. (NYSE: DHI) Q3 2020 earnings call dated Jul. 28, 2020

Corporate Participants:

Jessica Hansen — Vice President of Investor Relations and Communications

David V. Auld — President and Chief Executive Officer

Michael J. Murray — Executive Vice President and Chief Operating Officer

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Analysts:

Alan Ratner — Zelman & Associates — Analyst

Stephen Kim — Evercore ISI — Analyst

John Lovallo — BofA Securities — Analyst

Carl Reichardt — BTIG — Analyst

Eric Bosshard — Cleveland Research — Analyst

Michael Rehaut — JPMorgan — Analyst

Matthew Bouley — Barclays — Analyst

Truman Patterson — Wells Fargo — Analyst

Susan Maklari — Goldman Sachs — Analyst

Buck Horne — Raymond James — Analyst

Mike Dahl — RBC Capital Markets — Analyst

Presentation:

Operator

Good morning and welcome to the Third Quarter 2020 Earnings Conference Call for D.R. Horton, America’s Builder, The Largest Builder in The United States. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

It’s now my pleasure to turn the call over to Jessica Hansen, Vice President, Investor Relations for D.R. Horton. Jessica, please go ahead.

Jessica Hansen — Vice President of Investor Relations and Communications

Thank you, Kevin, and good morning. Welcome to our call to discuss our results for the third quarter of fiscal 2020 in addition to current market conditions.

Before we get started, today’s call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton’s Annual Report on Form 10-K and subsequent reports on Form 10-Q, all of which are or will be 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 in the next day or two. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentation section under News & Events for your reference.

Now, I will turn the call over to David Auld, our President and CEO.

David V. Auld — President and Chief Executive Officer

Thank you, Jessica, and good morning. I am 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.

We’d like to first, again, express our gratitude to our country’s dedicated field of healthcare workers and to all who are on the frontlines caring for our communities. Our thoughts remain with those affected by this pandemic and our priority continues to be the health and safety of our employees, customers, trade partners, and the communities we serve.

During the latter part of March, the impacts of COVID-19 and related widespread reductions in economic activity across the United States began to negatively affect our business. During April, when restrictive stay-at-home orders were in place for most of our markets, our sales orders decreased and our cancellations increased and our April net sales orders were 1% lower than a year-ago.

However, as restrictive orders began to be lifted across many markets and economic activity resumed, our sales increased significantly and our cancellations rate returned to normal levels. In both May and June, our net sales orders increased by more than 50% compared to the prior year period, resulting in a net sales order increase of 38% for the quarter.

We sold 5,931 more homes this quarter than the same quarter last year, positioning D.R. Horton to achieve further gains in market share and scale. We have continued to see strong increases in net sales orders in July compared to the same month last year.

Despite the disruption from COVID-19 on our operations, the D.R. Horton team delivered a record third quarter, including net sales orders of 21,519 homes, a 25% increase in consolidated pre-tax income to $782 million, and a 10% increase in revenues to $5.4 billion.

Our pre-tax profit margin for the quarter improved 170 basis points to 14.5%, while our EPS increased 37% to $1.72 per diluted share. Our homebuilding return-on-inventory for the trailing 12 months ended June 30th was 21.6% and our consolidated return-on-equity for the same period was 19.9%.

While housing market conditions are very strong today, we remain cautious as to the impact that COVID-19 may have on the overall economy and our operations in the future. We believe our strong balance sheet, liquidity position, and experienced operating teams position us very well to operate effectively through changing economic conditions.

We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales pace, and inventory levels to optimize return on our inventory investment in each of our communities based on local housing market conditions. Mike?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Diluted earnings per share for the third quarter of fiscal 2020 increased 37% to $1.72 per share compared to $1.26 per share in the prior year quarter. Net income for the quarter increased 33% to $631 million compared to $475 million. The current quarter results include an income tax benefit of $38.1 million related to federal energy efficient home tax credits that were retroactively reinstated earlier in the year.

Our third quarter home sales revenues increased 10% to $5.2 billion on 17,642 homes closed, up from $4.7 billion on 15,971 homes closed in prior year. Our average closing price for the quarter was essentially flat with last year at $295,200 and the average size of our homes closed was down 3%, reflecting our ongoing efforts to keep our homes affordable. Bill?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Net sales orders in the third quarter increased 38% to 21,519 homes and the value of those orders was $6.3 billion, up 35% from $4.7 billion in the prior year. Our average number of active selling communities was essentially unchanged from both the prior year and sequentially. Our average sales price on net sales orders in the third quarter was $294,500, down 2% from the prior year, primarily due to a decline in the average sales price for our West region as more of the region’s mix shifted to our entry level Express brand during the quarter.

The cancellation rate for the third quarter was 22%, up from 20% in the prior year quarter. Our net sales orders in both May and June increased by more than 50% compared to the prior year periods. We believe the increase in demand after April has been fueled by increased buyer urgency due to lower interest rates, the limited supply of homes at affordable price points, and to some extent pent-up demand.

We were and remain well positioned for this increased demand with our affordable product offerings, lot supply, and housing inventories, particularly completed homes and those close to completion. Jessica?

Jessica Hansen — Vice President of Investor Relations and Communications

Our gross profit margin on home sales revenue in the third quarter was 21.6%, up 30 basis points sequentially from the March quarter and up 130 basis points compared to the prior year quarter. We remain focused on managing the pricing, incentives, and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.

We currently expect our home sales gross margin in the fourth quarter to be similar to the third quarter. However, there is uncertainty regarding the future impact of COVID-19 on the economy and new home demand, which could negatively impact our gross margins in the future. Bill?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

In the third quarter homebuilding SG&A expense as a percentage of revenues was 7.9%, down 20 basis points from 8.1% in the prior year quarter. Our homebuilding SG&A expense as a percentage of revenues is at its lowest point in our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure appropriately supports our business. Mike?

Michael J. Murray — Executive Vice President and Chief Operating Officer

We ended the third quarter with 32,800 homes in inventory, 12,700 of our total homes were unsold, of which 2,900 were completed. We also had 1,900 model homes at the end of the quarter.

Due to a significant increase in sales in May and June, the portion of our backlog that is not yet under construction is higher than normal and our number of completed unsold homes is lower than in recent years. As a result, we have accelerated our pace of home starts across most of our communities to ensure we maintain an adequate number of homes available for sale in each community to meet demand.

At June 30th, our homebuilding lot position consisted of approximately 335,000 lots, of which 34% were owned and 66% were controlled through purchase contracts. 32% of our total owned lots were finished and at least 52% of our controlled lots are or will be finished when we purchase them. Our current lot portfolio includes an ample supply of lots for homes at affordable price points and continues to provide us a strong competitive position. David?

David V. Auld — President and Chief Executive Officer

Our third quarter homebuilding investment in lots, land, and development totaled $1.1 billion; of which $390 million was for finished lots, $380 million was for land development, and $290 million was for land. $180 million of our land and lot purchases in the third quarter were from Forestar.

After slowing our lots and land and development investment in March and April, we have since increased our pace of investments to ensure we maintain an adequate number of finished lots to support our home construction pace. Bill?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Forestar, our major — our majority owned subsidiary, is a publicly traded residential lot manufacturer operating in 51 markets across 22 states. Our strategic relationship with Forestar as a well-capitalized lot supplier across much of our operating footprint is serving us well during this volatile time and is presenting opportunities for both companies to gain market share. Forestar is delivering on its high growth expectations with revenue growth of more than 200% and net income growth of 80% fiscal year-to-date in 2020.

At June 30th, Forestar’s lot position consisted of 50,700 lots, of which 38,300 are owned and 12,400 are controlled through purchase contracts. 77% of Forestar’s owned lots are already under contract with D.R. Horton or subject to a right of first offer under our master supply agreement.

Forestar is separately capitalized from D.R. Horton and has approximately $700 million of liquidity, which includes $350 million of unrestricted cash and $350 million of available capacity on its revolving credit facility. At June 30th, Forestar’s net debt-to-capital ratio was 25.2% and their next senior note maturity is in 2024.

With low leverage, ample liquidity, and its relationship with D.R. Horton; Forestar is in a very strong position to navigate through changing economic conditions and continue to grow their business. Jessica?

Jessica Hansen — Vice President of Investor Relations and Communications

Financial services pre-tax income in the third quarter was $68.8 million with a pre-tax profit margin of 43.9% compared to $48.1 million and 40.2% in the prior year quarter. Despite the disruption in the secondary mortgage markets in March and April caused by COVID-19 and the uncertainty of the impact of the CARES Act, our mortgage company has continued selling the mortgages that originates at strong net gains.

We began retaining servicing rights on some of our FHA and VA loan originations during the third quarter due to disruptions among mortgage servicers and we will continue to monitor developments in the mortgage markets and adjust our operations to adapt to changes in market conditions.

For the quarter, 97% of our mortgage company’s loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 71% of our home buyers. FHA and VA loans accounted for 53% of the mortgage company’s volume.

Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 718 and an average loan-to-value ratio of 91%. First-time homebuyers represented 57% of the closings handled by our mortgage company, reflecting our continued focus on offering homes at affordable price points. Mike?

Michael J. Murray — Executive Vice President and Chief Operating Officer

DHI Communities is our multifamily rental company focused on suburban garden style apartments that had four projects under active construction and one project that was substantially complete at the end of the quarter. After selling two projects earlier this fiscal year, no other projects were slated to be marketed and sold during our third or fourth quarters of fiscal 2020.

We expect to market and sell a couple of projects in fiscal 2021, based on our current pace of construction and leasing activity. After pausing construction starts and new acquisitions by DHI Communities in March, April, and May, we began selectively resuming plans for new projects in June and we still plan to grow the DHI Communities platform. DHI Communities assets totaled $225 million at June 30th.

We also continue to evaluate our opportunities in the market for single family rental homes. We are currently building and leasing homes in nine single family rental communities across our operations, as we are in the early stages of our participation in this growing segment of the housing market. Bill?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Our balanced capital approach focuses on being disciplined, flexible, and opportunistic. Our strong balance sheet, ample liquidity, and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our Company.

During the nine months ended June, our cash provided by homebuilding operations was $1.2 billion compared to $606 million in the prior year period. At June 30th, we had $3.7 billion of homebuilding liquidity consisting of $1.9 billion of unrestricted homebuilding cash and $1.8 billion of available capacity on our homebuilding revolving credit facilities.

Our homebuilding leverage was 18.4% at the end of June with $2.4 billion of homebuilding public notes outstanding and $400 million of senior note maturities in the next 12 months.

At June 30th, our stockholders’ equity was $11 billion and book value per share was $30.38, up 16% from a year-ago. For the trailing 12 months ended June, our return-on-equity was 19.9% compared to 17.3% a year-ago.

During the quarter, we paid cash dividends of $64 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August. We did not repurchase any shares during the third quarter and we expect to cautiously manage our level of share repurchases in the near-term to maintain financial flexibility until we have better visibility to future market conditions and our expected operating results.

Our outstanding share count is down 2% from a year-ago and we currently have an outstanding share repurchase authorization of $535 million. Jessica?

Jessica Hansen — Vice President of Investor Relations and Communications

As we noted last quarter, due to the uncertainty in the U.S. economy and our business operations from COVID-19, we withdrew our guidance for fiscal 2020. Based on today’s market conditions, we are now providing our expectations for the fourth quarter of fiscal 2020.

In the fourth quarter, we expect to generate consolidated revenues in a range of $5.5 billion to $5.8 billion and to close approximately 18,000 homes to 19,000 homes. We expect our home sales gross margin in the fourth quarter to be similar to the third quarter in the mid 21% range and homebuilding SG&A in the fourth quarter to be 8% to 8.2% of homebuilding revenues.

We anticipate our financial services pre-tax profit margin in the fourth quarter of approximately 40% and we expect our income tax rate to be approximately 23%. We plan to provide annual guidance for fiscal 2021 when we have sufficient visibility into market conditions, hopefully on our next earnings call in early November. David?

David V. Auld — President and Chief Executive Officer

In closing, our results reflect the strength of our experienced operational teams, industry-leading market share, broad geographic footprint, and diverse product offerings across multiple brands. Our strong balance sheet, ample liquidity, and low leverage provide us with significant financial flexibility to effectively operate in changing economic conditions and we plan to maintain our disciplined approach to investing capital to enhance the long-term value of our Company.

Thank you to the entire D.R. Horton team for your focus and hard work. Your efforts during this time have been remarkable. We are proud of your work ethic and your positive spirit, as you safely continue helping our customers close on their much anticipated new homes.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is coming from Alan Ratner from Zelman & Associates. Your line is now live.

Alan Ratner — Zelman & Associates — Analyst

Hey, good morning, guys. Congrats on a great quarter and glad to hear everyone is doing well.

First question on the spec inventory supply, not surprisingly came down quite a bit just given the dynamics in the quarter and how strong demand was there. And you mentioned obviously a greater percentage of your backlog right now is not yet started, which makes a lot of sense.

I’m just curious, as you ramp your start activity here and I’m sure other builders are doing the same to not only build out your existing backlog but replace the spec inventory presumably, what are you seeing on the labor side as far as any tightness there or any inflation that’s starting to build up because it seems like there’s a pretty healthy ramp in starts coming?

David V. Auld — President and Chief Executive Officer

Labor has been a challenge throughout this entire market cycle. So, we focused early on, on driving efficiency through the operation partnering with our labor trades and have seen the benefit of that all the way through the cycle.

The reality is, as I think Mike will tell you, the bill cycles continue to be very-very stable and just the process of how we build and how we treat our trade has proven to be very effective in managing the situation.

Alan Ratner — Zelman & Associates — Analyst

Got it, okay. That’s helpful. Second question, just as you start to think about ’21 here and the sustainability of this demand is certainly a big question at this point. In the last several years, you’ve done a handful of M&A transactions on the private side and I’m curious you mentioned buyback –potential buyback activity.

How are you thinking about M&A right here given the climate and what are you seeing as far as the pipeline is concerned?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Good morning, Alan. We continue to evaluate different opportunities and it still comes down to where we can add to the long-term value of the company, where we can add product and new customer base to serve. But more importantly, people that are accretive to the operating teams.

So, we continue to talk with several private builders. We’re more inclined to look at the tuck-ins that we have done either adding to existing markets or opening up new markets for us. But you won’t see us probably do any massive public acquisitions, but I do think we will continue to evaluate the smaller privates.

Alan Ratner — Zelman & Associates — Analyst

Have you seen any changes in the private’s willingness to sell just given kind of the uncertainty in the climate today or has this bounce back in activity perhaps emboldened them a little bit to remain an independent company?

Michael J. Murray — Executive Vice President and Chief Operating Officer

I would say it’s both. And it’s going to vary based upon the situation of a particular private builder as to whether they’re thinking it’s still a good place to be or if it’s time for them to do something different and to join a bigger operation.

Alan Ratner — Zelman & Associates — Analyst

Understood. Okay, guys. Thanks a lot. Good luck.

David V. Auld — President and Chief Executive Officer

I will add that we don’t — we’re not in a position where we need to go ahead and it really does have to be a great fit and at this point they would have to want to join our family and it’s not going to be a stretch kind of a win-win for them and us.

Operator

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

Stephen Kim — Evercore ISI — Analyst

Thanks very much, guys. I wanted to follow up on the cycle time and spec question that Alan just asked. So, you mentioned cycle times are very stable. That’s obviously extremely encouraging and exemplary I would say, but we have seen your specs are down and obviously demand has surged significantly.

So, I guess the bottom line question for me is would you like to increase your spec levels from where they are today and are you able to do so in an environment where demand is as strong as it has been?

Michael J. Murray — Executive Vice President and Chief Operating Officer

As to your first question, yes, Stephen, we would like to increase our spec levels today. We have an aggressive starts plan to increase our specs. At the same time, we’ll be starting our sold homes and so it is a big plan to start houses. But as David mentioned before, we’ve been focusing early on, on the efficiency in the product and the operational focus and partnering with our trade and being sure that they’re capable of supporting the growth that we have in front of us.

So, we do think we’ll be able to increase our spec inventory, but it’s not going to be without a lot of effort I can promise you that.

David V. Auld — President and Chief Executive Officer

The focus right now is on driving a consistent sustainable start program week-to-week, project-by-project. And as we continue to execute that, I think our spec counts will come back to what we historically have carried.

Stephen Kim — Evercore ISI — Analyst

Yes. No, that’s great. Very encouraging to hear and obviously we would — we look to Horton to take on those challenges. I wanted to ask a second question about pricing and the pricing environment. It would — it seems obviously that Express remains extremely strong.

I’m curious if you’re seeing increased interest in Freedom and the traditional D.R. Horton business more recently and whether that allows for a little bit more pricing flexibility perhaps than we had seen in the past, particularly the D.R. Horton semi-custom business?

And the second half of that question is whether or not you’re seeing the mix of local demand versus out-of-state demand driving what you saw in May and June? And is there a difference in your ability to price — push price for when you’re selling to a local versus out-of-state?

David V. Auld — President and Chief Executive Officer

I would say, as to the branding, we are seeing uptick in demand for both Freedom and the D.R. Horton brand. As to the state question, I would say we’re seeing increase in demand from both of my profiles. The relocation of people down to a more affordable tax-friendly environment continues. I think COVID maybe is even accelerating that.

Pricing is something we track week-to-week, based upon demand at each individual flag and it’s kind of — I’ve always considered pricing at our sites. You want to — you never want to be in a position where you push pricing so hard that you have to come back and adjust it back down.

You always want people to feel like if they buy today, they will save a little bit money — they’ll save money versus buying six months or a year from now. So, fortunately, our company, the entire structure and mentality is that those decisions are made in the individual communities and divisions and the people that are closest to the market actually, we feel make a better decision than we can make up here.

Stephen Kim — Evercore ISI — Analyst

Great. That’s very helpful. Thanks a lot, David.

Operator

Thank you. Our next question today is coming from John Lovallo from Bank of America. Your line is now live.

John Lovallo — BofA Securities — Analyst

Hey, guys. Thank you for taking my questions. The first one, May and June at 50% year-over-year order growth is clearly very encouraging. Just I know you said July was strong, David. Just curious if you could help us frame that in any way how strong it was on a year-over-year basis?

David V. Auld — President and Chief Executive Officer

It’s consistent with what we saw in May and June.

John Lovallo — BofA Securities — Analyst

Okay, that’s —

David V. Auld — President and Chief Executive Officer

It really is a testimony to our people and our positioning out there, but it’s a very-very-very good market right now.

John Lovallo — BofA Securities — Analyst

Okay. That’s really encouraging. With that in mind, the overall tone maybe could be seen as just slightly more cautious than some of your peers, which is I think consistent with how you guys have always sort of run the business and I think it’s prudent.

But just curious, is this really conservatism just given unemployment, COVID, things that could happen or are you seeing any signs anywhere of any slowing in traffic or whatever it might be?

David V. Auld — President and Chief Executive Officer

No signs of slowing. It’s just a lot of uncertainty out there that is completely outside of our control. If you just look at long-term price in the industry, demographics, where the supply is versus where the future demand is going to be or should be even today, you got to feel very-very good about the long term. But in this industry, I mean you saw what happened at the end of March completely out from nowhere.

So, I do think we’ll have a lot more visibility as we get into the November/December time period next year, and hopefully we can reinstate the guidance numbers that we can then turnaround again.

John Lovallo — BofA Securities — Analyst

Thank you very much.

David V. Auld — President and Chief Executive Officer

We’re always going to be conservative. I mean, if you got Bill Wheat for a CFO, you’re going to have conservative.

John Lovallo — BofA Securities — Analyst

Thanks, guys.

Operator

Thank you. Our next question is coming from Carl Reichardt from BTIG. Your line is now live.

Carl Reichardt — BTIG — Analyst

Thanks. Good morning, everybody. I’m going back to Alan and Steve’s question about spec and the amount of unsold you have. And maybe Mike or David, is this — if you look at your backlog — your sold backlog, are you closer to completion with that than you would typically be at this time of year?

And of your unsold spec, are you closer to finishing that than you normally would be this time of year?

Michael J. Murray — Executive Vice President and Chief Operating Officer

So, I would say that we are generally going to be in line with — the started sold homes are across the range of production largely at this time of the year, delivering into the fourth quarter and similar with the specs.

We’re probably maybe a little bit less finished with the specs because of the strong sales demand that we’ve had, they’ve moved to the sold category and we have them sort of set to close, if you will — sold to close in the September quarter.

So, we feel really good about the ability to deliver the fourth quarter and the starts plan that we have out and the building permits we’re able to accumulate. We feel good about being able to reload the inventory and bring us back to sustainable inventory levels we need to support the demand.

Carl Reichardt — BTIG — Analyst

Okay. Thanks, Mike. Obviously, it’s a function of the vagaries of this market, so just trying to understand the math.

And then just a bigger picture question. In your release and on the call, you talked about low rates motivating folks and maybe some pent-up demand. Didn’t talk about this idea of deurbanization or dedensification driving demand. And I’m curious if that’s something you think you’ve seen and if you have some sort of sense from the field or math that tells you that you’re seeing more and more folks coming from urban areas to purchase homes in suburbs or exurbs? I’d just like your observations on that. Thanks a bunch, folks.

David V. Auld — President and Chief Executive Officer

I think — well, this is David. I think that’s a trend that was in place before the COVID-19 program and I think it’s really tied toward the millennial being a more conservative disciplined buyer of homes than previous generations. They were forming households later, having children later, and I think this pandemic has accelerated that trend.

And like — what do you call it — pent-up demand or pull forward demand or there’s just a whole lot of people out there that I think are going to be looking for housing over the next five plus years.

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Hey, Carl, I think what you’re referring to is a longer-term trend I think is continuing as I think certainly pandemics had an effect on it. We would generally agree that that is a trend that probably is accelerating right now, but it’s still too early to know the depth of that and the sustainability of it.

So, we try to just comment on what we see in front of us and then we’ll live into the rest and be able to comment on the depth of that as time marches on.

Carl Reichardt — BTIG — Analyst

Thanks, Bill. Congrats, guys.

Michael J. Murray — Executive Vice President and Chief Operating Officer

Thank you.

Operator

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

Eric Bosshard — Cleveland Research — Analyst

Good morning, sir.

David V. Auld — President and Chief Executive Officer

Good morning.

Eric Bosshard — Cleveland Research — Analyst

Yes, good morning. Curious, in terms of what your plans are in terms of price and incentive. I know you had talked previously a quarter ago about sustaining incentives. But seeing where orders are, your inventory appears healthy; what is the strategy in terms of price and incentive in total?

And then secondly, if you could just drill a little bit more into California specifically on that question as well.

Michael J. Murray — Executive Vice President and Chief Operating Officer

So, broadly on the price and incentive, as David mentioned before, it’s a very local decision that’s made. I can tell you that we did see very strong sales demand and so the level of incentives we were offering on sales later in the quarter were much lower than where we opened the quarter with.

So, we did see firming pricing trends, firming incentives and in turn — but to see where that’s going to go, we’re going to need the market and right now we feel really strong about the sales trends that we’re seeing without needing to do heavy incentives.

But every day, at Horton Communities, there is some level of incentives and potential pricing adjustments to meet the market whether that’s up or down, and we do see tremendous value created with the urgency for buyers, as David mentioned before, feeling like they will save a little bit of money if they act today rather than wait for a few more weeks.

David V. Auld — President and Chief Executive Officer

As to California, we’re seeing stability and consistency out there today. We have reset our product and positioning out there to the entry level pretty much everywhere we can and it’s driving better returns today than it has in the last four or five years.

Eric Bosshard — Cleveland Research — Analyst

Great. And then just one follow-up if I could. In terms of land acquisition as demand has improved broadly and it appears that builders broadly are more active and aggressive in buying land; anything you’re seeing different in terms of the competitive environment for securing land or any impact that’s having on the cost of securing land?

David V. Auld — President and Chief Executive Officer

Land prices are going to go up as absorptions continue to move up. So, our focus has been and will continue to be relationships with developers. The fact that our operating — operational teams in these markets have been there a long time, have great relationships with the land sellers, I think gives us an advantage. Our ability to close gives us an advantage.

Our absorptions per flag — if you’re developing lots, you want to be selling to somebody who is going to drive very high absorptions. So, it’s — I do believe we have a competitive advantage of people and capital and just operational efficiency.

So, I can tell you right now we’re seeing a lot of deals. The COVID-scare I think really created opportunities for us to open relationships with sellers that had been primarily selling to other competitors. So, we feel very good about our land position today and the things we put in place to sustain that over time.

Operator

[Operator Instructions] Our next question is from Michael Rehaut of JPMorgan. Please proceed with your question.

Michael Rehaut — JPMorgan — Analyst

Hi, thanks. Good morning, everyone, and congrats on the results. First question, I didn’t catch — and apologies if you had mentioned it — what your average community count did this quarter sequentially or on a year-over-year basis? And obviously, with the incredible amount of strength and sell through right now, if you could give us any sense of how you’re thinking 4Q might trend at least in the near-term?

Jessica Hansen — Vice President of Investor Relations and Communications

Sure, Mike. Our community count was flat both sequentially and year-over-year. And as you can imagine with our very strong sales pace, we might not be in a position to see community count growth in Q4. It will probably stay closer to flat, maybe slightly down, but we have the lot position to continue to deliver homes and communities going forward. So, we feel very confident in our ability to continue to drive absorptions and ultimately have some community count growth that may just be pushed a little bit further out later next year.

Michael Rehaut — JPMorgan — Analyst

Okay. Also with — I was just kind of curious about kind of on this topic with Forestar giving out guidance of mid-point of about 11,000 lot deliveries for next year and I believe that was a little bit below their prior guidance pre-COVID and understanding that obviously there was disruption perhaps in some of the development activities for a month or two.

At the same time, you guys are looking at very-very strong results currently and into July. I was just trying to get a sense for maybe how that reconciles Forestar, may be looking at a bit less of a delivery year than originally planned despite demand coming back extremely strong for you. How those two, kind of, fact patterns work against each other because I would have thought perhaps and maybe it’s just more of a timing issue, but 1,000 lots is not immaterial. So, just trying to get a sense of how to reconcile those two data points?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Yes. Mike, it is primarily timing. It’s July of 2020 and Forestar was re-establishing just preliminary delivery guidance for fiscal ’21 at a time in which their largest company — largest customer is not providing 2021 guidance. So, it’s just early.

Felt like it was important for Forestar to re-establish at least a baseline expectation for their topline growth next year, given that they are truly a growth story and the revenues have been up over 200% this year. But it is a bit conservative we hope and as we live over the next few months and as D.R. Horton gets sufficient visibility to provide guidance for fiscal 2021, our hope would be certainly if demand trends continue as they are right now and the strength continues in the industry, I would expect that Forestar would ultimately be able to exceed that and increase their guidance over time. It’s really timing.

Michael Rehaut — JPMorgan — Analyst

All right. One more quick one if I could squeeze another one in. On the gross margins, obviously a lot of strength there and you mentioned that you’re getting some pricing power back obviously which makes sense. Is there — and I know you’re not giving fiscal ’21 guidance at this point. But just conceptually perhaps, if you’re looking at your gross margins and backlog currently and what you’re seeing on the ground in terms of just achieving some incremental pricing, achieving some incremental scale, etc., is there any reason to think that you wouldn’t be able to hit like a 22% gross margin next year with all those factors just given the momentum you have right now? Again, just trying to think conceptually, obviously I know you’re not giving guidance right now, but just along those lines if you have any thoughts?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Conceptually, we would love the 22% gross margin. But looking forward, we could see that there could be some headwind coming at us from lumber later into the fourth quarter and into early ’22 — early ’21 excuse me, I’m getting confused in my years. And we do have a backdrop right now of a strong demand environment and some pricing power and relief for incentives.

So, we have some positive tailwinds, but we also have some headwinds. And there is still the broader outlook that we’re looking at here what’s going to happen in the economy and how the pandemic progresses through the fall and into the winter of next year.

So, we feel very good about being consistent with our level of margins to drive the right pace that ultimately for us is looking to drive the right return and that’s what we’re ultimately looking at it in every community. It’s how do we maximize the return we built with every community.

Jessica Hansen — Vice President of Investor Relations and Communications

Our company-wide — I apologize for the background noise on the line, I’m not sure where that’s coming from. In terms of our overall company-wide ROI, Mike, we’re at 21.6%, which I think is probably a record return-on-inventory that we’ve generated that’s delivering almost 20% return on equity as well. So, we’ll continue to balance that pace and price, as Mike mentioned, to maximize returns for both inventory and equity.

Operator

Mike, you’re off mute now. Go ahead. If you said something, sorry.

Michael Rehaut — JPMorgan — Analyst

No. Just — thanks a lot. Appreciate it.

Operator

Our next question today is coming from Matthew Bouley from Barclays. Your line is now live.

Matthew Bouley — Barclays — Analyst

Hey, good morning. Thanks for taking the questions. Hope everyone is doing well. I wanted to stick with the gross margin side. I guess specifically just given some of the underlying pricing strength in the market, how are spec margins comparing versus to be built today?

And going forward, when you have this decline in available spec here and in particularly finished spec, how should we think about what the implication to gross margins would be as a result of that? Thank you.

Bill W. Wheat — Executive Vice President and Chief Financial Officer

It’s certainly in a strong demand environment where we’ve been selling a lot of completed specs, the gap between margins between specs and build to order is narrower than normal. But still typically we do still see higher gross margins on a build to order versus a spec, but today that gap is a little tighter than usual.

Matthew Bouley — Barclays — Analyst

Okay, understood. And then just secondly and apologies if I missed this. But Bill, if you could speak a little bit about the share repurchase plans and sort of what it will take to help — to kind of foster reaccelerating that? Thank you.

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Sure. There’s a lot of moving pieces right now. We went through a very volatile quarter in terms of demand, in terms of what we had to do in our operations and in the adjustments we’ve made there and still going forward, it’s in our forward visibility. We’re seeing extremely strong demand. We’re seeing a sell-through of our spec inventory so we’re actively re-accelerating our specs now.

So, first and foremost, we’re focused on our business and what we feel like we need to reinvest to keep our spec inventory at the level we’d like and keep our lot inventory replenished. And so, until we get a better sense of what that need is in the core business, then we’ll adjust our — then we’ll put our plans in place for share repurchase.

Over the next few months, we’ll be sitting down with all of our operators across the company and putting in place our business plans for fiscal ’21. And as we get that set, then that will help further define and give us better clarity on what we’ll do in terms of our share repurchase.

So, our statement is we’re going to cautiously manage our share repurchase and we still have an authorization in place and we’ll update those plans accordingly as we get better visibility in our business.

Matthew Bouley — Barclays — Analyst

Great. Thank you for the color.

Operator

Thank you. Our next question today is coming from Truman Patterson from Wells Fargo. Your line is now live.

Truman Patterson — Wells Fargo — Analyst

Hi, good morning, everyone. Nice quarter. So, just I don’t think anybody is really expecting you to run at 50% plus order growth forever just given the supply side constraints. Are you all really focused on thinking in the next quarter to pushing price a little bit harder to kind of curb these absorptions or are you pretty comfortable at this pace in running at these absorptions given your community count and lot count and everything? Just trying to understand which lever you’re really trying to lean on a bit more going forward?

David V. Auld — President and Chief Executive Officer

Right now, we’re very comfortable with our lot position going out into ’21. We have seen significant and competitive advantage results from the continued consolidation and market share gains. There is — what we focus on internally is consistent sustainable operations and feel very good about our pace right now. The market is certainly there and the pricing side — short-term price increases actually increase demand sometimes.

So, again, it’s an art and we leave those decisions to local markets. So, like Bill said, over the next 30 days we will be putting together an operating plan for ’21 finalizing. I guess, we’ve had one for some time, but finalizing it and that will drive a lot more visibility about how we’re going to position for ’21 and then ’22 and then ’23.

Truman Patterson — Wells Fargo — Analyst

Okay. Thanks for that. It sounds like your lot positions may be bucking some of the industry trends recently. If I look at your fourth quarter implied backlog conversion rate, it looks like it falls to about 80%, the lowest level in — I don’t know — five years or so. I think that’s pretty clearly a function of construction delays or maybe lack of starts during COVID.

Do you think that you can get that back up and running where your backlog conversion gets to kind of normalized or flat in the first quarter of ’21 or second quarter of ’21 somewhere in there? And then also on that, how long do you think it will take for you to get your spec count kind of normalized in today’s market?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

Well, yes. First, we’re not seeing really construction delays. Our cycle times have been very consistent really throughout. And backlog conversion really isn’t a stat that we focus too much on. We focus more on our inventory position and our inventory turns. And right now, we’re seeing our inventory turns accelerate. Our sales pace obviously has increased dramatically in the last few months, which did work down our completed homes — completed specs. So, our completed spec inventory is lower than it has been in some time. Also, the component of our backlog that is sold, but not started is higher than normal.

So, as we accelerate our starts pace, that will bring those to back to a closer — closer to a normal level, and we expect to still deliver very strong volume. But it takes really our lot position and our home position to support that.

Truman Patterson — Wells Fargo — Analyst

Okay. Asked another way, your inventory turns will probably be lower in 4Q, do you think that kind of gets back to more normalized levels in the first half of ’21? Would that be the case you’ll see?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

I think they’re likely. I think our inventory turns are actually higher than they were a year-ago and I think Q4 will continue that way. I think that was part of our original guidance for fiscal ’20, was that we expected to turn our housing inventory more quickly this year and that is what we’re doing.

Truman Patterson — Wells Fargo — Analyst

Okay. Thanks for taking my questions.

Operator

Our next question today is coming from Susan Maklari from Goldman Sachs. Your line is now live.

Susan Maklari — Goldman Sachs — Analyst

Thank you. Good morning, everyone. My first question is just around — obviously, there is a lot of uncertainty as we think about the broader macro environment. And given your buyer base, have you done any analysis or have any thoughts on the impact of the reduction in the stimulus programs that are scheduled to come up later this week? How do you think that that has kind of played into the demand that you’ve seen over the last couple of months and how are you thinking about it going forward if there are changes there?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Good morning [Speech Overlap] I’m sorry go ahead.

David V. Auld — President and Chief Executive Officer

No, you go ahead.

Michael J. Murray — Executive Vice President and Chief Operating Officer

What I think we’re seeing with most of our buyers and the traffic we’re seeing is that those people are not directly participating in a lot of the stimulus programs or relief packages that are out there. The underwriting required for a mortgage today is generally going to first start with a job and a steady predictable income stream.

And so, we’ve not seen a direct impact to that. To the extent there is a broader follow through to the economy, we’ll have to wait and see. That’s part of the conservatism I think in our outlook going forward is to see how that plays through in the broader economy.

David V. Auld — President and Chief Executive Officer

And just to add, the amount of stimulus that’s already been pushed out and will continue to be pushed out I think between now and the end of the year is going to impact the markets for multiple years. It’s just a lot of liquidity that will filter through the overall economy and I think have a positive impact on housing and people’s ability to buy a house.

Susan Maklari — Goldman Sachs — Analyst

Okay. That’s helpful. And then you noted in your commentary that the average size of the home came down 3% in the quarter. But as we kind of look out at some of the secular shifts that are perhaps coming through from COVID, more people working from home, their kids being home a lot more; are you seeing any of your buyers that are actually looking for a slightly larger home or more space or any kind of changes to the layout?

Michael J. Murray — Executive Vice President and Chief Operating Officer

We are seeing more consideration given to a setting that accommodates a better work-from-home environment, whether it’s an extra bedroom to be used for a classroom, an office, a playroom that provides a little more space. But a lot of our floor plans today accommodate at a lesser aggregate square footage, a lot of very functional space, whether that’s flex rooms or four bedrooms that work very well for them today.

So, we’re really pleased with the product offering that we have out there. But fortunately, in most of our neighborhoods, we’re able to respond to buyer demand very quickly and adjust to what the current buyers in our sales offices are asking for with our inventory homes with the next round of starts we have in given neighborhood.

Susan Maklari — Goldman Sachs — Analyst

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Buck Horne from Raymond James. Your line now live.

Buck Horne — Raymond James — Analyst

Hey, thanks. Good morning. Congrats on the quarter. Question on SG&A a little bit. As you’re trying to ramp back up on the land spend and get some more flags in the ground, is there any sort of near-term disrupt — not disruption, but are you going to have to reinvest in hiring people or do you need to start reaccelerating technology investments to keep up with the pace of demand right now?

Is there anything on the SG&A side that we should consider in the near-term as demand has so rapidly increased that you need to accelerate some investment there?

Bill W. Wheat — Executive Vice President and Chief Financial Officer

No, Buck, I don’t think we see anything that will move the needle dramatically. It’s just a continuation of what we’ve been doing. We did briefly have a hiring freeze during that month or so at the beginning of the pandemic, but we’re back to normal in terms of hiring across our homebuilding and financial services operation. We are growing the business. We’re always hiring and adding where we need to.

Same thing on technology, we’ve been making continuing investments over the last number of years and we’ve redirected some of those during the pandemic to address the work-from-home environment and a few things like that, but those expenditures are not anything that’s really out that it’s going to move the needle in total, because there’s also things we’re not spending as much money on today. Travel is not as big a portion of our spending as in the past. Hopefully at some point it can be. But we’re in a company lull in terms of our historical SG&A percentages and expect to be able to stay at that level going forward.

Buck Horne — Raymond James — Analyst

All right, great. Congrats and very helpful. Thank you. Next question just is on the single-family rental component. It seems like your thoughts have evolved on that potential market opportunity and what you’re seeing in terms of maybe the potential for a build for rent product offering in your communities.

I just wonder if you could expand upon your thoughts at this point. Is that something you would like to have a portfolio that you could operate internally? Would you look to sell those as you build them or partner with another operator? Just how do you think about single family rentals at this point?

Michael J. Murray — Executive Vice President and Chief Operating Officer

Buck, that’s something that we’re still learning our way into. We feel really good about the handful of communities, I believe nine communities today that we have homes being constructed for the purpose of rental and we’ll have to see.

We’ll have to see what the market brings us if we bring some of those communities to market for sale or if we build a portfolio to operate or aggregate to a portfolio for eventual disposition. It’s something we’re learning our way into today. so we’ll be back with you as that progresses.

Buck Horne — Raymond James — Analyst

Okay. Fair enough. I appreciate it. Thanks and congrats on the quarter.

Michael J. Murray — Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question is coming from Mike Dahl from RBC Capital Markets. Your line is now live.

Mike Dahl — RBC Capital Markets — Analyst

Good morning. Thanks for taking my questions. The first question I wanted to go back to the sold but not started in backlog and I think you guys mentioned a few times and Bill, you responded to a previous question that percentage is higher than normal, which makes sense. Could you actually — could you give us what that percentage is in terms of what’s sold but not started and how that compares on a year-over-year basis? And maybe as part of that, I don’t know if you have any quantification of kind of like what an average — I know your build cycle is flat, but what an average delivery quote would be in terms of what you’re able to quote to new buyers today versus what you’d normally be able to?

Michael J. Murray — Executive Vice President and Chief Operating Officer

I’ll take the second part of the question while Bill and Jessica are looking for the answer to the first part. Right now, we would not be able to quote to you an average because it’s going to vary based upon which community you’re in and the level of production that’s available within that community and the type of product that it is.

In some communities, we have a very quick build time and can deliver homes from start to completion in three months. In others it may be a four or five-month build cycle. And then generally, we’re looking if we have inventory that’s available to move in within the next 30 days as soon as you can clarify your mortgage situation and get qualified. We’d like to have a home that’s ready for you as soon as you can — you need it.

Mike Dahl — RBC Capital Markets — Analyst

Got it. Thanks.

Jessica Hansen — Vice President of Investor Relations and Communications

And then, Mike, on the sold not started, we’re running low double digit a little over 10% sold not started, which we normally I think would be in a low single-digit percentage maybe [Speech Overlap]

Mike Dahl — RBC Capital Markets — Analyst

Got it. That’s really helpful. And then second question and not to belabor the pace versus price too much, but understanding that it’s a local decision. The — are you getting the sense that your local operators are — given some of the uncertainty that may still be out there, they are making the decision to let pace run a little hard for the foreseeable future just to capture what’s out there while it’s still out there type of mentality versus those operators pushing price more aggressively. I know you talked about incentives coming down, but just wondering if you have kind of a pulse of what your local operators are leaning towards today?

David V. Auld — President and Chief Executive Officer

Mike, the pace versus price versus margin has a lot to do with community size or it is in the community. You may push price in a community where you’re on the back end of it and your deliveries sales pace is going to be three or four months’ worth of inventory or six or seven months’ worth of inventory.

And then you have other communities where you might have a thousand lots in front of you and driving pace actually generates a higher return than trying to find that absolute right margin dollar that either cuts off sales or allows sales to increase.

And we trust our operators in the field to make those decisions, we incentivize them to make good decisions. And it’s a model that’s been a part of the company for the 32 years I’ve been here and it seems to be working. So, it really is a community-by-community process.

Mike Dahl — RBC Capital Markets — Analyst

Got it. Thanks. Just a quick follow-up to that then. As you think about the 2021 plans, is that when you may introduce a little more kind of nudging in one direction versus the other or is it you’re really just — I mean, what you’re seeing today is pleasing in terms of how everything is being managed?

David V. Auld — President and Chief Executive Officer

We could do better and we can make better decisions pretty much every day. You get up and don’t make a mistake, you probably didn’t do anything. So, we’re going to walk through communities with our operators and we’re going to talk to them. Are you making the decision that is going to drive the highest return for the shareholder?

But ultimately, what we have seen over years and years and years is that when you empower people and you give them authority and responsibility, they become better managers and their relationship — it’s a culture. I mean, it’s who we are. And we’re just not going to sit up here and try to drive pricing decisions in a community and pick any market you want to.

Buck Horne — Raymond James — Analyst

Okay. Fair enough. Thanks, David.

Operator

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to David for any further or closing comments.

David V. Auld — President and Chief Executive Officer

Thank you, Kevin. We appreciate everybody’s time on the call today and look forward to speaking to you again in November. And to the D.R. Horton family, once again, you have outperformed the industry, setting record — all-time record for sales — 21,500 sales — unbelievable accomplishment. D.R. Horton, the entire executive team, we’re humbled and thankful that we’re here to represent you.

Mike Dahl — RBC Capital Markets — Analyst

[Operator Closing Remarks]