Toll Brothers 4Q16 Earnings Call Notes

Toll Brothers’ (TOL) CEO Douglas Yearley on Q4 2016 Results

Starting to benefit from millenial buyers

“With the millennial generation now entering their thirties and forming families, we are starting to benefit from the desire for home ownership from the affluent leading edge of this huge demographic wave. In fiscal year 2016, approximately 22% of our settlements included one primary buyer 35 years of age or under. We currently are courting these customers with our core suburban homes, urban condos and rental apartment properties. ”

Markets that are softer

“So, I gave in my statements the markets that are really strong. I don’t need to repeat those. There were many out west, but there are also many in the east. The markets right now that are softer for us would be Minneapolis, we have two communities; Illinois, which we talked about for a year is it’s just not returning as we thought it would; Huston, which we talked about many times and it’s at the higher price point, yes that is definitely softer and it is the location where we will have our first launch of T|Select; Connecticut, where we haven’t bought land in years and we have shrunk in size and it has its own issues, not just 5 million in Greenwich [ph] but throughout the state; and then Maryland, which has also been softer a while and we have talked about it, and we’re doing really well in Northern Virginia but we have struggled in Maryland. So that is the bucket of locations where we build that we have seen softness and we have redirected our Company into other areas, as you can see through the growth out west and in other places to account for it.”

Lennar 3Q15 Earnings Call Notes

Homebuilding market continued to improve at fairly consistent pace

“Our results reflect the slow but steady growth in the overall homebuilding market. This year, summer season and the spring selling season before it confirm that the market is continuing to improve at a fairly consistent pace.”

Balance sheets are starting to be repaired

“A growing number of individuals’ balance sheets that were impaired by the economic downturn are starting to be repaired as the economy improves and as time passes and U.S. population continues to grow.”

Supply is limited but this market could not support a strong increase in production

“Even though supply is limited as demand is building, we do not anticipate a surge in production. Frankly, I don’t think that the current market conditions could support a strong increase in production. A combination of land, labor and mortgage availability are simply put limiting factors to a surge in production.”

A shortage of entitled land

“Limited capital for land and land development has left entitled lands in short supply while growing demands has driven up land prices. In most major U.S. market, the ability to grow quickly is limited by the available land, and the market’s ability to bring new land to entitlement is limited by a constrained capital market for land developers…Land continues to be the most challenging competitive environment in the homebuilders universe today.”

Labor has also become a limiting factor

“Running a close second, labor has also become a limiting factor. The slow and steady recovery in housing did not signal to the labor market that it was time to come back to work in the sector, and many found work elsewhere. Today, the entire labor market has tightened and rapid growth in housing production will be limited by available labor.”

Regulatory environment for mortgages remains tough

“Finally, the regulatory environment for mortgages remains challenging and limits the number of entrants for the for-sale market. QM and QRM rules together with the ATR, that is the ability to repay rules, continue to restrict qualified purchasers from accessing the mortgage market.”

Don’t want to equate this to the last cycle. Labor environment much different

“one thing I don’t want to do is start equating to the last cycle, because this recovery is very, very different in its composition. We highlighted that there are some interesting and somewhat unique limiting factors. I highlighted land. I highlighted labor and I highlighted mortgage availability. And while land had been constrained in prior cycles, the labor constraint today is a limiting factor that is somewhat different than we’ve seen in the past and mortgage availability is clearly a very different overlay in this cycle.”

Houston is still decent overall energy corridor has been hit though

“Well, this is Rick, I’ll talk about Houston. I would say that the Houston market is still overall a pretty decent market. Clearly with the decline in oil, the energy corridor there has been hit which is pretty much the far west side of the market.

Higher price points have been hit harder than lower in Houston

“Now, if you look at that, it hasn’t been across all price points. The lower price points, let’s say, sub-$300,000, $350,000 are performing pretty well. It’s just when you get up in that $350,000-plus, the price point sales has been impacted and have slowed. Those would be the big master plan communities that are on the west side of town.”

TRID is implemented October 3

“October 3rd is the date that TRID is implemented for new applications, and our team has been very focused with the software vendors and with training to make sure it goes as smooth as possible.”

The land market is capital constrained

“I think that the land market is constrained in lot of levels, not the least of which is the capital constraint. The traditional lending avenues have remained close to the land asset as a basis for opening doors to lending. And so as production is really being forced to expand to normalize, land is behind the eight ball, and the enabling factor – that is, the access to capital – is continuing to constrain the ability to entitle new property.”

Toll Brothers FY 3Q15 Earnings Call Notes

Housing recovery is built on a solid foundation

“This housing recovery appears to be built on a very solid foundation. We believe that the slow but steady acceleration we and the industry are experiencing bodes well for the long-term health of the housing market based on increasing household formations, pent-up demand and the current industry-wide production that is still well below historic norms. With our great land positions, well-established brand, broad product and geographic diversification, and solid financial footing, we are very optimistic about the future.”

Slight difference in mix led to lower than anticipated ASP

” Our Q3 unit delivery total was consistent with our expectations, but a slight difference in mix resulted in a lower average delivered price than anticipated. ”

Demographics support housing market

“Population continues to grow. If the supply of homes in the market remains well below historic norms, as does new home production. An improving employment landscape, three consecutive quarters of accelerating household formations, pent-up demand, increasing rents and still attractive affordability are supporting the for-sale housing market’s steady recovery.”

Strong job picture should lead to rising home prices

“As the job picture continues to improve, greater demand should lead to rising home prices, which we believe should encourage more people to sell their existing homes and move up or add a second home. Based on these and other factors, we believe the housing market remains on an upward trend and has considerable room to grow.”

Too early to tell if currencies are having any impact on foreign buyers

“there really hasn’t been much of a change. In Northern California, 10% of our buyers are foreign nationals. I can’t give you the breakdown as to what nationality, but 10%, and that’s been a consistent number over the last couple of years. Southern Cal, it’s also about 10%. That is down a little bit from when it was around 15% or even up as high as 20% in 2014. In New York City, we run about 13% foreign nationals. And that number, again, has been fairly consistent. What’s going on lately, it’s too early to tell. It’s too early to read anything into it over the last couple of weeks. We’re obviously keeping a very close eye on it, but most of our international buyers are Asian-American, been here for generations, not impacted by their home country economy. And that’s certainly what’s driving the California market, Seattle, and many markets for us. And that buyer seems quite confident and ready and able to buy. But we’re obviously, as everyone is, keeping a very close eye on it. But right now it’s just too early to tell you much more than that.”

Pricing power is very strong in California

“Right now the markets out there continue to be very strong. We continue to have terrific pricing power. We manage pricing weekly. We’ll open a new phase and there will be a line of people at the door when we open at 10:00 AM, and we’re able to raise price once again in many of our locations in Orange County and up in the East Bay and South Bay of San Francisco. We’re continuing to experience that type of overwhelming demand, and we move the price.”

We don’t think we’re running off a cliff

“We’re trying to be cautious because we’re always aware of running off the cliff. So far, we don’t see a cliff, we just see nice sunny skies and level ground.”

Not seeing any issues with buyers qualifying for loans

“Our buyers remain to be strong. We have on the margin, a few people that struggle to qualify, but overall, we’re able to get the vast majority of our people into a mortgage if they want one. We’re not seeing any issue at all, really, on a macro sense with qualifying for loans.”

The jumbo rate is below the conforming rate

“Actually, today, the jumbo rate is below the conforming rate, which is pretty astounding. We’re seeing very strong demand for jumbo.”

Insurance companies will be directly underwriting mortgages!

“We believe we’re going to introduce a, for the first time in our history, direct sales to a major insurance company, which will be huge. So – and that also, by the way, is going to open up financing for foreign nationals but to a greater degree than we have today. So, I don’t see any issues at the moment in terms of availability or liquidity in either the conforming or the jumbo market.”

Land market is healthy

“Deal flow is everywhere. Competition is the same, those with money, the big builders and the wealthy investors. As I’ve said many times, we’re opportunistic…It continues to be a healthy land market. It’s a competitive market, and we are, we think, very good at it, and very selective and careful on our underwriting.”

KB Home 1Q15 Earnings Call Notes

Economy continuing to strengthen

“By most metrics, the national economy is continuing to strengthen, whether you consider job growth, the unemployment rate, GDP growth or consumer confidence. At the same time, mortgage rates and affordability remain favorable. Resale inventories levels are low, price appreciation continues and the share of home sales that are distressed has declined. There have also been recent reports published regarding the acceleration of household formation as millennials are finding jobs in the improving economy and moving out on their own. This age group is also now entering their prime home buying years which could create significant demand going forward.”

Housing recovery gaining traction, plenty of runway

“The housing recovery is gaining traction with plenty of runway before we reach normalized volume levels. Our increasing traffic is a strong indication that demand is on the rise. While our average community count was up 22% year-over-year in the first quarter, our traffic levels were up 46%. We believe that this acceleration in traffic can be attributed to not only improved housing fundamentals but also the favorable response to our new community openings which feature the right products in the right locations.’

California doing well

“In California, the Bay Area is very strong with solid job and income growth occurring in an area with limited housing supply. Our net orders in the Bay Area were the primary driver of our positive order comp in our West Coast region. In Southern California, the coastal area is showing a real uptick in demand after a soft fourth quarter and there are indications that the strengthening demand is starting to ripple inland once again. We are particularly pleased with our strong order comp in our Southwest region. Las Vegas continues to be one of our best performers in net orders per community in a market demonstrating strong demand.

We are also seeing encouraging signs in Phoenix, where we are working to expand our community count in a market that is stabilized and improving. Our central region continues to perform wel’

No signs of slowdown in Texas

“There has been a lot of new coverage on the impact of declining oil prices on jobs and housing in Texas. At this time, we are not seeing any evidence of a slowdown in demand. While the central region was up a solid 15% in net orders, Houston’s results actually exceeded the region’s average. ”

Delivered 1593 homes in Q1

“We delivered 1593 homes in the first quarter representing a conversion rate of 55% of beginning backlog”

Spring selling season has been very encouraging

“The early signs of spring selling season have been very encouraging and we are well positioned to take advantage of this demand.”

More first time buyers poking around

“We are certainly seeing, with the traffic increase, a lot of people that are out for the first time, looking around. I don’t know that we can share that we have seen a big swell in sales to the first time home buyers yet but it’s an encouraging trend. And I agree, the data is always subject to revisions. The consistency and the uptick over the last couple of quarters would suggest that it’s a real trend and we will see. To me it’s really the missing link in a fulsome and sustained housing recovery.”

So much pent up demand

“it’s an incredible pent up demand that seems to be starting to get unlocked.”

Cost of build went up faster than price

“you have a combination of — in many of our markets our cost of build went up faster frankly, than we could move price. So we have some margin erosion on the cost of build.’

Mortgage situation remains tight

“I certainly think the mortgage situation remains tight. And it is holding back the recovery. You know we have talked about things like the mortgage insurance premium came down and that’s a good thing. I do feel that the big banks still have overlays and are still conservative in their underwriting because of the rules and the impact of Dodd-Frank are still getting clarified. So you have a recovery that’s occurring and demand is growing. It’s still a top shelf borrower, I will say, in that FICO scores that five years ago you could get a loan on you still can’t get today.”

Toll Brothers FY 1Q15 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Delivered 1091 homes, signed contracts on 1063 units

“Revenues of $853 million and home building deliveries of 1,091 units rose 33% in dollars and 18% in units compared to FY ‘14s first quarter totals. The average price of homes delivered was $782,000 compared to $694,000 in 2014’s first quarter. Net signed contracts of $873 million and 1,063 units rose 24% in dollars and 16% in units compared to FY ’14’s first quarter. The average price of net signed contracts was $821,000, compared to $766,000 in 2014’s first quarter.”

Backlog of 3651 units

“Backlog of $2.74 billion and 3,651 units rose 2% in dollars and was basically even in units compared to FY ’14’s first quarter end backlog.”

258 selling communities

‘ We ended the quarter with 258 selling communities, compared to 238 one year ago.”

Momentum building into spring selling season

“Momentum continues to build as we begin the spring selling season. In our first quarter, we achieved 24% growth in the dollar value of signed contracts. Since the start of the second quarter which began on February 1, contracts in units are up 13%. We continue to benefit from our ongoing geographic diversification strategy.”

Houston is strong

“Since much attention has focused on Houston, let me share a couple of facts. Houston has remained solid with backlog cancellation rates well below the company average and contracts per community up compared to last year. Of roughly 150 Houston homes in backlog at fiscal year-end, we have had just one cancellation.’

NYC, Socal and Norcal are top three markets

“New York is still good. It is second or third to Northern and Southern Cal in terms of the quality of our markets.”

No story to tell on weather

“how quickly everybody forgets how rough last winter was in many regions of the country. It was very cold and very snowy. Again it’s cold this year. It’s a little less snowy, unless you’re up in New England. We’ve looked at weather a bit, but I don’t think there is a story to tell there.”

Sometimes people actually come out more in bad weather

“Story to tell is that usually, if you’ve got good land, you got good offering and you’re hot, bad weather brings them out for some strange reason.”

“Well yes, excluding Boston. It’s amazing the power they find in order to get there. Even in deep snow, shovel the walk up to your front door, you can sell houses.”

“Massachusetts this past week, we have about 8 communities, took 13 deposits.”

People are confident that they can sell their existing homes

“We’re not hearing of issues our buyers have with selling their existing home. In fact, as this recovery strengthens, we’re hearing better news that they’re more confident they can sell their home and that’s why our traffic is up and they’re out in the market anticipating the ability to sell their home later in the spring.”

Custom designed homes not spec

“there is no change in the buying style or philosophy of our buyers. Their preference is always to custom design the home and make it one of a kind, with every addition, every finish, every upgrade that suits their lifestyle and it’s personal to them, that is always the desire. But like I say in certain markets on certain occasions, specs are needed and we think we have the right number in those locations.”

How we’re thinking about land

“We’re thinking about land as we’ve always thought about it which is to be very opportunistic, take advantage of our balance sheet and buy what we think is the best land at the corner of Main and Main to set up the company for many years to come and that’s how we’re going about it.”‘

We certainly feel better than we did in November/December

“we’re now three to four weeks into a spring selling season and there are more buyers in the market. We talked about California and our strategy and how we’re bringing on the Toll homes and how well that’s working. But where we sit today, we certainly feel better and have more pricing power than we had in November and December.”

Just because you’re selling a higher priced product doesn’t necessarily mean profitability goes up too

“I think we do continue to see some rising inputs but I think what we’ve really seen is our mix shift to California and a higher priced product out there which has driven the ASP or ADP for the year to be up. Profitability doesn’t necessarily go up just because you’re in a higher priced geography.”

Labor is still short but getting better

“Labor is still short but it’s getting better as we get further into this cycle. Most markets we have very few if any issues. California’s an example where we’re selling a whole bunch of homes, building backlogs and we’re still able to deliver homes in six, seven months. So it’s easing and certainly feels a lot better.’

Smaller builders are capital constrained

“They’re still constrained. The small guys have not come back into the business. They’re unable so far, at least in our markets, to find the capital to compete on the land deals that we go after. We’ve always loved our position because we tend not to compete against the large public builders who tend to look at land and locations that supports lower-priced housing. The land market is about the same as it’s been over the last of couple years. We’re very selective. We’re very diligent and we continue to buy land.”

D R Horton FY 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

CEO retired

“I’d like to take a minute to recognize Don Tomnitz on his recent retirement and thank him for his leadership, advice and support over the years. On behalf of the entire D.R. Horton team I’d like to congratulate him on an outstanding carrier of 31 years with the company, 15 years as our CEO.’

New CEO is not a spotlight kind of guy (the conference call shows it too, a very team oriented approach)

“I guess the initial focus is really getting our handle on this public position role Stephen I have always been behind the curtain kind of guy and being pushed out front is different for me.”

Focus is just to keep us doing what we’re doing

“Three to five years down the road I think my goal is just to continue the excellence companies had, focus is on consistency really on a day-by-day, subdivision by subdivision execution. I feel like our position in the industry today is so unique, the fact that we have been the largest for as long as we’ve been the largest, the geographic footprint that we have it really is, if we just execute and do what we can do on a day-to-day basis we should have a great three to five year run.”

Texas is still strong, lower oil prices could help us in other parts of the country

“Texas remains strong for us. I think if oil prices stay down it could soften somewhat but any softening we see in Texas, I think low oil prices should create additional demand in the other markets. So we’re Texas based but we’re significant in really every market in the country that we want to be in. So it’s pretty good balanced for us. Could actually be beneficial.”

land costs pretty flat, other costs up 5%

“Our land cost has remained relatively flat as a component of the overall cost going into our house. We called out some of the other things that did impact our margin this quarter but land remained relatively flat…And in terms of the other input cost on a year-over-year basis we have seen some cost pressures, our stick and brick cost on a per square foot basis were up about 5%. On a year-over-year basis, sequentially they are up about 2%.”

We’re happy with how things have gone so far in October

“our October sale phase was strong and we feel good with what we’ve seen thus far even though we’re only 11 days into November and greater than 20% in October. As David said earlier we’re on plan to deliver what is in our business plan and you’ll have to wait till January to see what we deliver for the quarter.”

Still a very good sales month for us

“I wouldn’t read anything special into whether we accelerated or decelerated in October. I think in general we would still say it’s a very good sales environment, still a very good sales month for us.”

Our assumption is that there aren’t big changes from new FHA guidelines

“In terms of the FHA, FHA clearly there is a lot of talk going on in terms of our assumption as we look at our business. We are not assuming any change in the mortgage environment, just the same current mortgage lending standards. “

Lennar FY 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Housing recovery has not accelerated

“Generally speaking, the market has continued a slow and steady recovery that is markedly different from past down cycle recoveries. History would suggest a more vertical recovery especially given the severity of the economic decline. This recovery has been a decidedly different experience as the slope of recovery has been shallow and the expected acceleration has not materialized.”

Before this downturn 1m housing starts would have been considered a housing depression

“Before this downturn, anything below 1 million housing starts in a year was considered almost a housing depression. This recovery is just now getting us back to that level of starts. We’re still adding to a deficit in production given the housing needs of the country and that in our opinion limits the downside for the recovery going forward.”

Labor and materials cost $49/sqft

“Year-over-year, labor and material costs are up 8.5% to around $49 per square foot. This represents a mild slowing of the pace of cost increases as last quarter, cost were up more than 9% over the year.”

Sales are up and down but definitely on an upward trend

“I’d just say, Michael, I think that what we’ve been seeing is that the market is tending to move a little bit around; a little bit up, a little bit down. You get that sense on a weekly basis and on a monthly basis. But the trend line is decidedly upward and as I’ve said – I probably said it three times in my remarks, it’s a gentle upward slope and you’ve got upward and downward movement around that kind of direction. And I think that’s what we’re seeing basically in our sales as we go through the months and through the weeks.’

I hold the competition in high regard

“I think you know well that I hold the competitive landscape in very high regard and I think that everybody’s – the large well capitalized builders, the strategies of the competitive field are all strong and viable and somewhat differentiated.”

We did a good job acquiring land and we’re hands on

“Our strategy, which we’re quite pleased with, is very focused on a combination of good strategic land purchases and really hands-on community by community management. So as you know we got out ahead of the market in terms of land acquisition. We bought great strategic communities in really well located positions and we’ve been able to really leverage the harvesting of those communities, continue to leverage the community positions that we have. But I think that maybe the equally important component of this is our management structure and management team is very focused on a community by community basis of managing every day and the balance between volume, margin, SG&A spend, all of the components that drive and add to the decision making about pricing and incentives and everything else.”

First time home buyer at sun $175k price point

“We really view that first-time buyer as a sub 175, sub $200,000 price point. ..So we’ve been putting these positions together over the last year to really target that buyer. It’s a little bit tougher to get under 175, much, much tougher because of the land cost to get under 150, but we do view that as a very viable piece of the business. ”

the barriers are high for the first time buyer right now

” It’s still very difficult for that market to get reignited until we start to see a little bit more movement in terms of access to the mortgage market remembering that there are really three barriers to the first-time buyer coming back. First, it’s the down payment. Then it’s the very stiff underwriting and the bank overlays relative to accessing mortgage credit. And then finally the process itself has become fairly invasive, at least as far as people see the process and feel the process…So the process is almost designed to scare people away”

People are getting their credit ready to buy

“There has been some loosening of the credit underwriting at the margin, but it hasn’t been as significant as some has been reported. We stay very close to the customer in the field, we see who is coming in, we see what their commentary is. Remember that the rental market has accelerated in terms of its monthly payment requirement, it’s cost of living and that’s really driving people to say, I want to buy a home, I’d like to fix my cost, I’d like to find access to the mortgage market. So we’re watching what happens as they come in and staying very close to the purchaser in the field. Now with that said, the barriers are high and over time the market adjust to those barriers. People start saving, more down payment. They find a way; they get help from family. They start focusing on credit statistics as rental rates go up and they become more volatile because each year there is a re-pricing. People become ignited to get their credit credentials buffed and polished and ready for underwriting. They take a deep breath and they prepare themselves to go through the mortgage process. So you have two things kind of going in opposite directions. People are becoming more prepared and the mortgage market is opening up at the margins. And the only thing that we can really do is stay very close to the purchaser in the field, see what they’re seeing, feeling and finding as they try to access the new home market and use that as a guide post for really diving in and participating.”

Larger guys are picking up share

“I think there is a reality right now and that is the credit landscape is tight. It’s not just tight for the purchaser looking to gain access to the mortgage market but it’s also been very tight for smaller builders and for traditional land developers to get back in the market and to do the things that they do. So I think the larger, well-capitalized builders with access to the land market in a more comprehensive way have been able to pick up market share and that is something that seems like it’s continuing going forward.”

Toll Brothers 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Traffic strong through August

“We are encouraged by our traffic, which was up 13% on a per community basis for the quarter compared to fiscal year 2013. This pattern has continued into August with traffic up 19% per community versus last August.”

Industry demand continues to be impacted by rising prices and limited income growth

“The national housing data has been somewhat volatile in recent months. Without real urgency pushing buyers to make a decision, general industry demand continues to be impacted by uncertainty about the economy and world events, improving but fragile consumer confidence and reduced affordability due to rising prices and limited personal income growth.”

The industry needs to be building 50% more homes per year than it is

“One data point we do have confidence in is the low level of production compared to historic norms. The population grew during the recession and has continued to increase since then. Based on trends over more than 40 years, the industry should be building 50% more homes this year than its current pace to meet the increased population demographics.”

Seeing some people take a little more risk in mortgage originations

“We have seen some green shoots and some good news on the self-employed front. We’re actually seeing people come out with products targeted to self-employed people and no verification of income loans with 30% down and good credit scores. But instead of just not looking at the borrower at all, they’re looking at cash flows. It will take 12 months’ worth of bank statements to ensure that the person really has the cash flow regardless of their tax return. So I think that’s really good news, and frankly I think it’s prudent.”

1.8% of people who come to tour a home buy historically

” if you look historically at the company, from 1994 to 2004, about 1.8% of our visitors signed a binding contract, and that rocketed last year in the third quarter to the highest ever of 3.5%. And that was because traffic was anemic as we talked about, but those that came in were highly qualified, highly motivated, and buyers. This past quarter, 2.7% of our traffic signed a binding contract. So while the comp to last year at 3.5%, the highest ever, is difficult, we are still running significantly higher than what happened from 1994 to 2004″

Probably doesn’t go back to 1.8% because people have more info now when they come to an open house

“A big part of that is the Internet. I don’t think we ever fall back to 1.8% of our traffic buys a home. I think it will stay higher because today’s traffic is more qualified, more motivated, more educated”

More people are playing with housing again

” What happens is when you get the high traffic rates, it’s an indication that the whole market is playing with housing again, not just the exclusive those who can afford it and are not trapped in the homes that they’re in.”

The election isn’t front of mind yet, but it will be

“The election hasn’t come to the front of the brain yet. But it’s getting there and I wouldn’t be surprised as we come closer to the election that we start to focus on the great number of things. There will a lot of promises made for sure. ”

Ya we’re disappointed by how this year has unfolded

“Looking back at the last year and thinking about the growth that we saw in 2013 and how deep and dark and long this last housing depression was, we thought the pent-up demand would continue to build and 2014 would be a significantly better year than 2013. And I think if you ask any CEO of any of the big public, they would tell you the same thing. So are we disappointed in flat or slightly negative order growth? The honest answer is yes.”

DR Horton 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Largest homebuilder

“D.R Horton has been the leader in the U.S homebuilding industry for 12 consecutive years. Our market share position today is the largest in our history, with 40% more homes closed than any other builder in the most recently reported 12-month period.”

Expect strong Fiscal 4Q

“With our 11,365 homes in backlog and the year-over-year improvement, we have seen in our sales during the first part of July, we expect strong home closings, revenues and profits in our fourth fiscal quarter ending September.”

Sold 8551k homes

“The value of our net sales orders in the third quarter increased 32% from the year-ago quarter to $2.4 billion. Homes sold increased 25% to 8,551 homes on 11% increase in active selling communities. Our average sales price increased 5% to $281,300, the cancellation for the third – cancellation rate for the third quarter was 24%”

Overall demand is stable

“we saw a significant increase in demand in 2013. And we saw a significant price appreciation in 2013. And so the levels of demand a year ago had increased dramatically. We all know that has moderated some since then and as we assess this spring, we would say on an overall basis the demand is relatively stable with where it was last year.”

Normal margins are around 20%

“the normal gross margins on this industry, a range between 18% to 22%, we believe a normalized gross margin for ourselves, or somewhere right at the 20% level”

8 or 9 year supply of land

” we have a total of 178,000 – 175,000 total lots and that’s about a 4 point – eight or nine year supply based upon on our trailing 12 month sales. So, we feel like that, we are in a very, very strong position that we are not out there in marketplace today, paying higher price for land, that we’ve got a great land inventory as we said quarter-after-quarter, with that very, very low cost basis in it.’

Costs are definitely increasing and prices are moderating

“we believe that pricing has moderated over the last probably nine months to 12 months. Costs are definitely increasing as our subcontractors and our vendors continue to try to raise their prices given where they had to take their prices so low during the downturn. So, we’re finding increasing prices with moderating increases in sales prices and we believe that the norm as Bill said earlier, we are going to gravitate back to a more normal level [of gross margin]”

Not at the peak of the cycle

“we don’t believe we are at a peak of cycle at all.”

Labor costs are driving cost increases

“I’d say on the labor side and our land still continues to be a benefit because we were early movers and in terms of our stick and brick costs we are seeing some pressure on the material side. But more so on the labor side its specifically in those local markets where we’ve seen pretty good growth in volumes.”

Toll Brothers 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Business has been a little better but mostly flat, May more of the same

“Demand over the past year has been solid although relatively flat compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle. So far in May the story has been more of the same. Traffic and deposits are up a little and agreements are down a little. Business continues to be good but relatively flat.”

Comps get easier in July

“Comparisons do get easier in July which last year was when we saw the impact of rising interest rates.”

There was a similar pattern in the 90s real estate recovery

“We note that the last cycle’s recovery in the early 1990’s began with a period of rapid acceleration followed by leveling before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent up demand building.”

TOL argues that supply is tight

“ew home inventory stands at just 5.3 months’ supply, based on current sales paces. If demand and pace increase, the 5.3 months’ supply could quickly be drawn down. Current demographics seem to suggest that new home sales should pick up. If the tight supply bumps into increasing demand, prices could rapidly rise.”

Think you’re going to see increased price levels

“I can’t think of the existing homes, but I think of the new home market, you are going to see continued and even increased sales price levels.”

Home buyers from the early 00’s are not underwater and may be getting ready to move

“if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on.”

Online shopping for homes leads to high conversion rate on visitors

“our conversion ratios of visitor to deposit and visitor to agreement, continue to run at all-time highs. So, the business has certainly changed in that. A lot of the work is done from the family room couch on the iPad and less is done in the sales office.”

A lot of people circling, bent up demand, but not buying at the rate we thought they would

“common sense tells me with this pent up demand that the level was at, you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.”

The conversation is much improved from ’08 ’09

“we can think back to ‘08 and ‘09 when virtually every visitor was in our sales center loving our decorating and our homes, but worried about their job security and the ability to sell their house and that conversation doesn’t occur anymore to any great extent. ”

Extremely high end is back with a vengeance

“I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just leads the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon.”

Inventory can get tight pretty quick, lead to price increases

“if you have got inventory at 5.3 months, that’s based on current sales, which are for new home sales something like 450,000 a year. If you get back to 700 which would not be any kind of real move because normally we did 1 million to 1.5 million…you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come”

A tight market for subcontractors, costs going up

“It’s an issue, it’s market by market. I think Texas for us is the worst. Our prices are up about $2,000 in this quarter. We are working through and it’s better now than it was earlier in the recovery because more workers have come back to the industry. But in hot markets where backlogs are big and we have lots of action and Texas is a good example. It’s a struggle. We are working through it. ”