Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

D.R. Horton (NYSE:DHI)
Q4 2017 Earnings Conference Call
Nov. 9, 2017 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Q4 2017 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. An interactive question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jessica Hansen, Vice-President of Investor Relations for D. R. Horton. Please go ahead.

Jessica Hansen -- Vice President, Investor Relations

Thank you, Kevin, and good morning. Welcome to our call to discuss our Q4 in fiscal 2017 financial results. 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 can lead to material changes in performance is contained in D.R. Horton's annual report on Form 10K and our most recent quarterly report on Form 10Q, both of which are filed with the Securities and Exchange Commission.

This morning's earnings release can be found on our website at investor. DRHorton.com and we plan to file our 10K next week. After this call, we will post updated supplementary data to our investor relations site on the 'Presentations' section under 'News and Events' for your reference.

The supplementary information includes data on our [Inaudible] return on inventory, home sales gross margin, changes in active selling communities, product mix, and our mortgage operations.

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

Thank you, Jessica, and good morning. In addition to Jessica, I'm pleased to 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. Our D. R.

Horton team finished year strong. Pre-tax income for Q4 increased 12% to 186 million dollars or 4.2 billion dollars of revenue and our pre-tax operating margin improved 10 basis points to 11.7%. Over the year we delivered results in line with or better than the original guidance we shared at the start of last year with consolidated pre-tax income increasing 18% to 1.6 billion dollars or 14.1 billion dollars of revenue. We closed 45,751 homes this year, an increase of 5442 homes or 14% over last year.

David Auld -- Chief Executive Officer and President

Our consolidated pre-tax margin for the year improved 30 basis to 11.4% and our return on inventory improved 120 basis points to 16.6%. During Q4 we generated 626 million dollars of cash from operations, bringing our total to 435 million dollars for the year and to 1.8 billion dollars over the past three years. These results reflect consistent strong performance across our broad geographic footprint and diverse product offerings. Our continued strategic focus is to produce double-digit annual growth in both our revenue and pre-tax profits while generating annual positive operating cash flows and improved returns with 26,200 homes in inventory at the end of the year.

Positive sales trends in October and 249,000 lots owned and controlled, we are well positioned for another strong year in 2018.

Mike?

Mike Murray -- Senior Vice President, Business Development

Net income for Q4 increased 10% to 313 million dollars or 82 cents per diluted share compared to 284 million dollars or 75 cents per diluted share in the prior-year quarter. Our consolidated pre-tax income increased 12% to 486 million dollars in Q4 compared to 433 million dollars. The homebuilding pre-tax income increased 13% to 458 million dollars compared to 405 million dollars. Our backlog conversion rate for Q4 was 87%.

As a result, our Q4 home sales revenues increased 11% to 4 billion dollars on 13,165 homes closed, up from 3.6 billion dollars on 12,247 homes closed in the year-ago quarter. Our average closing price for the quarter was $306,500, up 3% compared to the prior year due to an increase in our average sales price per square foot and a higher percentage of closings in our west region this quarter as a result of the hurricane impact in other regions.

In Q4 our Express Homes brand accounted for 37% of our homes sold, 34% of homes closed and 26% of home sales revenue and for the year it accounted for 34% of home sold, 31% of homes closed and 24% of home sales revenue homes. Homes for higher end, move-up and luxury buyers priced greater than $500,000 under both our D. R. Horton and Emerald Homes brands were 8% of our homes closed and 20% of our home sales revenue in Q4.

And for the year, they accounted for 7% of homes closed and 17% of home sales revenue.

Our Active Adult Freedom Homes brand is now being offered in 21 markets across twelve states and customer response to these homes and communities offering a low-maintenance lifestyle at an affordable price has been positive. Freedom Homes accounted for 1% of both our homes sold and closed in Q4.

Bill?

Bill Wheat -- Chief Financial Officer and Executive Vice President

The value of our net sales orders in Q4 increased 19% from the year-ago quarter to 3.1 billion dollars and homes sold increased 18% to 10,333 homes. Our average number of active selling communities increased 2% from the prior-year quarter. Our average sales price on net sales orders increased 1% to $301,600 and our Q4 cancellation rate was 25%. The value of our backlog increased 8% from a year ago to 2.7 billion dollars with an average sales price per home of $302,200.

And homes in backlog increased 7% to 12,329 homes.

Mike Murray -- Senior Vice President, Business Development

We're very pleased with our current sales pace and October sales were in line with our fiscal 2018 business plan, supporting our growth expectations for the year.

Jessica?

Jessica Hansen -- Vice President, Investor Relations

Our gross profit margin on home sales revenue in Q4 was 20.3%, down 20 basis points from the prior year quarter and up 50 basis points sequentially from the third quarter. The sequential improvement in our gross margin was primarily due to lower litigation charges in the current quarter. In today's housing market, we continue to expect our average home sales gross margin to be around 20% with quarterly fluctuations that may range from 19% to 21% due to product and geographic mix as well as the relative impact of warranty, litigation and interest costs.

Bill?

Bill Wheat -- Chief Financial Officer and Executive Vice President

In Q4 SG&A expense as a percentage of homebuilding revenues was 8.6%, down 20 basis points from the prior-year quarter. This quarter's SG&A includes approximately 3 million dollars of Forestar transaction costs and expenses related to the recent hurricanes. Homebuilding SG&A for the full year improved 40 basis points to 8.9% compared to 9.3% in 2016 as our increased revenues improved the leverage of our fixed overhead costs. We remain focused on controlling our SG&A while ensuring our infrastructure adequately supports our growth and we expect to further leverage our SG&A in 2018.

Jessica?

Jessica Hansen -- Vice President, Investor Relations

Financial services pre-tax income in Q4 was 27.7 million dollars. For the year, financial services pre-tax income increased 27% to 113 million dollars on 315 million dollars of revenues, representing a 32% pre-tax operating margin. 96% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations and our mortgage company handled the financing for 55% of our homebuyers. FHA and DA loans accounted for 46% of the mortgage company's volume.

Borrowers originating loans with DHI Mortgage this quarter had an average FICA score of 721 and an average loan to value ratio of 88%. First-time homebuyers represented 4% of the closings handled by our mortgage company consistent with the prior-year quarter.

Mike?

Mike Murray -- Senior Vice President, Business Development

We ended the year with 26,200 homes in inventory. 13,800 of our total homes were unsold with 9700 in various stages of construction and 4100 completed. Compared to a year ago, we have 13% more homes in inventory, putting us in a very strong position to start 2018. Our Q4 investments in lots, land and development totaled 771 million dollars of which 424 million dollars was to replenish finished lots and land and 347 million dollars was for land development.

Through the year, we invested 3.5 billion dollars in lots, land and development. We're planning to replenish our own land and lot supply in 2018 at a rate to support our expected growth in revenues.

David?

David Auld -- Chief Executive Officer and President

This year we achieved our previously stated goal of a 50% owned 50% option land and lot pipeline. We believe we can increase the option portion of our product line to 60% over the next few years while maintaining our number owned lots relatively flat with the current level. On September 30th, our land and lot portfolio consisted of 249,000 lots of which 125,000 are owned and 124,000 are controlled through option contracts. 91,000 of our total lots are finished of which 33,000 are owned and 58,000 are optioned.

We have increased our optioned lot position 35% from a year ago and we plan to continue expanding our relationship with land developers across our national footprint to further increase the option portion of our land supply. Our 249,000 total lot portfolio is a strong competitive advantage in the current housing market and a sufficient lot supply for our targeted growth.

Mike?

Mike Murray -- Senior Vice President, Business Development

On October 5th, we acquired 75% of the outstanding shares of Forestar Group, a publicly traded residential real estate company, for approximately 560 million dollars in cash. D. R. Horton's alignment with Forestar advances our strategy of expanding relationships with land developers across the country and increasing our option land and lot pipeline to enhance operational efficiency and returns.

At the acquisition date, Forestar had operations in 14 markets in 10 states where it owned directly or through joint ventures interests in 44 residential and mixed-use projects. Both companies are currently identifying land development opportunities to expand Forestar's platform. Since the closing a month ago, Forestar has been evaluating approximately 15 D. R.

Horton sourced opportunities located primarily in Texas, Florida, Georgia and the Carolinas, two of which Forestar has already closed. These 15 communities will yield approximately 8000 finished lots, the majority which could be sold to D. R. Horton in accordance with the master supply agreement between the two companies.

Forestar's aggregate peak inventory investment for this portfolio projects is expected to be approximately 200 million dollars and we expect Forestar to commit at least 400 million dollars of capital, primarily to D. R. Horton sourced projects during 2018.

We are also actively working with Forestar in plans for their existing projects and are in discussions for D. R. Horton to potentially purchase approximately 3000 lots from Forestar's current portfolio. The post-merger interactions between the D.R. Horton and Forestar teams have been very productive and we are pleased with the progress we are making on the integration. We are confident that Forestar's growth is likely to exceed the original projections outlined in our slide deck from June. We continue to be excited about the value that this relationship will create over the long term for both D.R. Horton and Forestar's shareholders.

As a public company, Forestar will continue to file quarterly and annual reports as well as any other required public information but they will not host quarterly conference calls. D. R. Horton will be handling Forestar's investor relations to allow the Forestar team to focus solely on integration and operations during the coming months.

Forestar operates on a calendar year and will file its 2017 annual report by mid-March of 2018.

We do expect Forestar to have a material impact on our fiscal 2018 earnings. We planned to outline the purchase accounting for the transaction and presentation of our consolidated results including Forestar and our Q1 earnings release in a conference call in January and we will provide an update on our integration progress at that time. We expect to provide initial Forestar guidance for 2018 in January. We then expect to provide additional 2018 guidance for Forestar on our second quarter call in April following Forestar's calendar year-end reporting.

Bill?

Bill Wheat -- Chief Financial Officer and Executive Vice President

During Q4 we generated 626 million dollars of cash flow from operations. For the full year, our cash flow from operations was 435 million dollars, in line with our original guidance. Our cash flow generation exceeded our updated guidance due to better than expected closings in late September and a greater than anticipated impact from the hurricanes on land development and construction activity. At September 30th our homebuilding liquidity consisted of 973 million dollars of unrestricted homebuilding cash and 1.2 billion dollars of available capacity on our revolving credit facility.

Our homebuilding leverage improved 520 basis points from a year ago to 24%. The balance of our public notes outstanding at September 30th was 2.4 billion dollars and we have a total of 400 million dollars of senior notes that mature in fiscal 2018 which we will likely refinance in the next few months. We ended the year with a shareholder's equity balance 7.7 billion dollars and book value per common share of $20.66, up 13% from a year ago. Based on our financial metrics and a positive outlook for fiscal 2018, our border of directors increased our quarterly cash dividend by 25% to 12.5 cents per share.

We currently expect to pay dividends approximately 190 million dollars to our shareholders in fiscal 2018.

We repurchased 1.85 million shares of our common stock for 60.6 million dollars during fiscal 2017 and currently have a 200-million-dollar share repurchase authorization outstanding effective through July 2018.

David?

David Auld -- Chief Executive Officer and President

A balanced capital approach focuses on being flexible, opportunistic and disciplined. Our balance sheet strength, liquidity, consistent earnings growth and cash flow generation are increasing our flexibility and we plan to utilize our strong position to improve the long-term value of the company. Our top cash flow priorities are to consolidate market share by investing in our homebuilding business and strategic acquisitions, reduce or maintain debt levels and return capital to our shareholders through dividends and share repurchase. We expect to generate at least 500 million dollars of cash from operations in 2018, growing to over 1 billion dollars annually in 2020.

As we generate increased cash flows, we expect to pay down debt, decrease our leverage, increase our dividend and repurchase shares to offset dilution with a target to keep our outstanding share count flat beginning in 2020.

Jessica?

Jessica Hansen -- Vice President, Investor Relations

Looking forward, our expectations for fiscal 2018 are consistent with what we shared on our July call and are based on today's market conditions. They also exclude any impact from Forestar. In fiscal 2018 we expect to generate a consolidated pre-tax margin of 11.5% to 11.7%. We expect to generate consolidated revenues between 15.5 and 16.3 billion dollars and to close between 50,500 and 52,500 homes.

We anticipate our home sales gross margin for the full year will be around 20% with potential quarterly fluctuations that may range from 19% to 21%. We estimate our annual homebuilding SG&A expense as a percentage of homebuilding revenues will be around 8.7% with our SG&A percentage higher in the first half of the year and lower in the second half. We expect our financial services operating margin for the year to be 30% to 32% with the first two quarters of the year lower and the Q3 and Q4 higher. We forecast an income tax rate for 2018 of approximately 3.52% and that our diluted share count will increase by less than 1%.

We also expect to generate positive cash flow from operations of least 500 million dollars in 2018 excluding any impact on the consolidation of Forestar in our financial statements. Our fiscal 2018 results will be significantly impacted by the spring selling season and we plan to update our expectations as necessary each quarter as visibility to the spring and the full year becomes clearer. We do not currently expect Forestar to have a material impact on D. R.

Horton's earnings in fiscal 2018. For Q1 2018, we expect our number of homes closed will approximate a beginning backlog conversion rate in a range of 83% to 86%. We anticipate our Q1 home sales gross margin will be around 20% and we expect our homebuilding SG&A in Q1 to be in the range of 9.5% to 9.8%.

David?

David Auld -- Chief Executive Officer and President

In closing, the strength of our team and operating platform across the country allowed us to deliver full-year results for 2017 in line with or better than the guidance we provided at the start of last year. While growing our revenue and pre-tax profits at a double-digit pace again this year, we generated 435 million dollars of positive cash flow from operations and improved our annual homebuilding return on inventory by 120 basis points to 16.6%. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace while continuing to generate annual positive operating cash flows and improved returns.

We are well positioned to do so with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offering across our D.R. Horton, Emerald, Express and Freedom brands, attractive finished lot and land position and, most importantly, our outstanding team across the country. We congratulate the entire D. R. Horton team or 16th consecutive year as the largest builder by volume in the United States and we thank you for your hard work and accomplishments. We look forward to working together to continue growing and improving our operations in 2018 as we celebrate our 40th anniversary year.

This concludes our prepared remarks. We will now take your questions.

Questions and Answers

Operator

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

You may press star 2 if you'd like to remove your question from the queue. Participants using speaker equipment, it may be unnecessary to pick up your handset before pressing star keys. Once again, that's star 1 if you'd like to ask a question.

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

John Lovallo -- Bank of America -- Analyst

Hey guys, thank you for taking my questions. The first question is as D. R. Horton becomes more asset light, cash flow should improve pretty meaningfully and, in our view, very meaningfully.

Where do you think free cash flow conversion can kind of trend over the next few years? And if it is as solid as we think at least, would you be open to more aggressively repurchasing shares?

David Auld -- Chief Executive Officer and President

John, we're taking this one step at a time but we've basically stated that we expect to achieve the cash flow from operations greater than five 500 million this year and we do expect that to ramp up over the next couple of years. We expect that by 2020 our cash flow from operation should be in excess of 1 billion dollars. That's our estimate today and our guidance today but certainly we do have high expectations for our ability to increase our option portion of our land position and certainly Forestar is a part of that as well and over the next year as we build our Forestar platform and it begins to contribute a greater impact on our overall operations. I do think we do have a lot of cash flow generation capability that could potentially see what we're guiding through now for the next couple of years.

On share repurchase, we are starting to repurchase more shares than we have historically and our target right now is to increase those share repurchases to a point that it fully offsets our dilution so that our share count will remain flat by like 2020. Certainly to the extent that we're able to generate more cash than we're currently guiding in time. That could change as well over the longer term but right now in a three-year window, we're targeting to offset dilution over the next couple of years.

John Lovallo -- Bank of America -- Analyst

Okay, that's helpful. And then touching on the options, the 60% option percentage that you guys have out there now, you've been talking about that for a bit. I mean, has the bogey changed at all given the inclusion of Forestar? I mean, is there anything that could prevent you from reaching much higher levels, [Inaudible] 70%, even 75%?

David Auld -- Chief Executive Officer and President

I think nothing's really changed with regard to the 60% target with Forestar. That's part of our strategy to achieve that. Over time, once we achieve that goal, we will continue to set higher goals for ourselves but it's one developer, one contract, one project at a time that we make these relationships work.

John Lovallo -- Bank of America -- Analyst

Okay, thanks very much, guys.

David Auld -- Chief Executive Officer and President

Thanks, John.

Operator

Thank you. Your next question today is coming from Alan Ratner from Zelman and Associates. Please proceed with your question.

Alan Ratner -- Zelman -- Analyst

Hey guys, good morning. Congrats on a great year and progress on Forestar. Exciting to see that moving forward. First question on Forestar.

You mentioned a few markets where you've already sourced and options and deals [Inaudible]. I think those are all existing Forestar markets if I remember correctly. I'm just curious, as you're ramping up the personnel within Forestar, have you looked into bringing that operation into some of your more higher cost markets like California, Pacific Northwest where obviously the land investment is going to be a much greater percentage of the home value, it would certainly tie up a lot more capital there? Any thoughts on really the viability of option and a meaningful percentage of lots out in those higher-cost markets?

David Auld -- Chief Executive Officer and President

Well, to your first point, Forestar has acquired a project in Florida which has not been in market they've been operating yet and we're looking to, as we talked about it, kind of bootstrap our way in, leverage the growth of Forestar into new markets, leveraging the Horton platform existing in those markets. With regard to [Inaudible] higher land basis markets, we have identified a couple of projects to take a look at up in the Pacific Northwest but because they are more capital intensive, they may be a little slower to grow the ramp there.

Alan Ratner -- Zelman -- Analyst

Got it. Okay, thanks for that. And the second question on M&A in general. Obviously, a big deal here in the space over the last couple of weeks.

I want to make sure I'm thinking about this correctly. On one hand, you're definitely looking to ship the business toward more asset-light which clearly the market is rewarding and seems to like. On the other hand, I know you guys are always been very focused on scale on both local as well as national and take a lot of pride in being the largest builder in the country and certainly, there are advantages to go along with that. So, I'm just curious now as you think about the allocation of capital, would it be inconsistent for you to continue to look toward M&A opportunities on the traditional homebuilding side of the business even if that means temporarily lengthening the land book if it comes with the benefit of increased scale.

Mike Murray -- Senior Vice President, Business Development

Alan, we look at deals every day and will continue to do that. We're looking for a fit or looking for something that is [Inaudible] that we can grow and we look then from the same [Inaudible] when we're looking at [Inaudible]. It's got to be fit ultimately for us and for the people but from a capital outlay standpoint, we want to return the of cash over the asset base within two years. So, that makes it difficult to look at the great big deals.

We've had a lot of success integrating small private companies in over the last four or five years, like what that does for our company, like the fact that you get the return of the cash pretty quick.

Alan Ratner -- Zelman -- Analyst

Got it.

Mike Murray -- Senior Vice President, Business Development

Are we going to look at them? Yeah, we're going to look at them. We're going to continue to look t them but it's a tough hurdle to get over.

Alan Ratner -- Zelman -- Analyst

Thank you.

Operator

Thank you. Your next question is coming from Stephen East from Wells Fargo. Your line is now live.

Stephen East -- Wells Fargo -- Analyst

Thank you. Good morning, guys. Just quickly to follow on Alan's M&A question. I know Forestar's not a big deal for you all but it's a big change in the way you all operate.

So, is your appetite for M&A changed at all temporarily?

Mike Murray -- Senior Vice President, Business Development

No. I mean, I think what we're trying to do is look at things on a consistent basis with a lot of discipline and does it make us better over the long term. So, what we talked about before is what we're going to continue to do and continue to talk about.

Stephen East -- Wells Fargo -- Analyst

Fair enough. All right, here comes my compound question here. Forestar, several things, I sort of call it the first hundred days plan. Maybe give a little bit more detail about what you all were talking about there as you look maybe over the next year or two and how that involves.

And did I hear you right that you expect that they would commit 400 million of capital in 2018? And then if so, just wanted to understand on your land and development, the 3.5 million you did this year, does that change with the Forestar spending 400 million or so in 2018?

Jessica Hansen -- Vice President, Investor Relations

Sure, Stephen, I know we gave a lot of detail on the call. We've actually got a timeline included in the presentation that we'll post that will outline kind of over the next year what we're planning on giving you further on Forster. It also includes some of those numbers we talked about but you did hear it correctly that we're planning to commit at least 400 million dollars of capital primarily to D. R.

Horton sourced projects during 2018. That doesn't mean we're only going to use 400 million dollars for Forestar this year. We're looking at it other capital sources and primarily in the near term we will likely put together a revolving credit facility and we ought to be recycling through some of their assets and bringing that cash back in the door as well.

Bill Wheat -- Chief Financial Officer and Executive Vice President

And, Stephen, in terms of our land spend at D. R. Horton, we're in year one of Forestar and as they build up our portfolio, we will still be replenishing our lot supply in 2018 at D. R.

Horton and we expect to keep our own lot supply relatively flat while we grow our option position with other land developers and as Forestar grows their platform as well. So, our land spend in order to replenish lots and land at D. R. Horton in fiscal 2018 will continue to be at or above the same level that we did this past year.

Certainly, over the long term, there's potential for that to not have to grow at the same pace and not have to replenish as much but we've got to build out the Forestar platform as well as our third-party developer platforms further.

Jessica Hansen -- Vice President, Investor Relations

Consistent with what you've seen each of the last few years that we would expect our inventory to grow at a slower rate than our revenues which will drive that continued improvement in returns.

Stephen East -- Wells Fargo -- Analyst

Gotcha. All right, great answers. Thank you.

Operator

Thanks. Your next question today is coming from Bob Wetenhall from RBC Capital Markets. Please proceed with your question.

Bob Wetenhall -- RBC -- Analyst

Hey, good morning and thanks for all the color and congrats on a good year. I want to go in the time machine back to 2006 when you delivered 53,000 homes and I think that's the peak deliveries for Horton since it's been a public company and you're talking about a billion dollars of free cash flow by 2020 which is a remarkable number. So, I was just trying to figure out between 2016 and 2017 you added about 5000 homes and it looks like you're going to add 6000 homes in 2018. What's the growth profile that you're kind of underwriting to get that billion free cash flow by 2020?

David Auld -- Chief Executive Officer and President

We plan on double-digit growth next three years. I mean, that's how we're setting up the operations of this company and we're going to get a little better building each house and [Inaudible] the market has got some legs and it's double-digit growth year over year over year generating a lot of cash.

Bob Wetenhall -- RBC -- Analyst

Just to be technical about it, you're jacked up about the outlook it sounds like.

Bill Wheat -- Chief Financial Officer and Executive Vice President

That's an [Inaudible], Bob, 10% to 15% growth over the next three years and continue to get more efficient and generate stronger returns which would mean inventory will grow at a slower pace than [Inaudible].

Jessica Hansen -- Vice President, Investor Relations

Specifically our revenue target, this year you'll see in our fiscal 2018 guidance, we're expecting mainly to come from closings growth. As we go over the next couple of years, we will give more specific but the target is for double-digit revenue growth.

David Auld -- Chief Executive Officer and President

I will tell you, Bob, the market feels really good, the positioning of this company with its people and its communities, never been better. So, yeah, we're pretty jacked up.

Bob Wetenhall -- RBC -- Analyst

This sounds good. One other question. Obviously, you have a very positive view of the marketplace. I wanted to get your view if the fed hikes next year say three or four times, does that put a damper on your ability to grow by reducing affordability or do you think where Horton's position in the market and renters becoming buyers, that's really not issuing and instead the Fed's tightening because the economy is good and they need to do it, there's job growth and that just means you're going to see more buyers.

David Auld -- Chief Executive Officer and President

Thanks a lot.

Bob Wetenhall -- RBC -- Analyst

Congrats on a great year.

Bill Wheat -- Chief Financial Officer and Executive Vice President

Thank you, Bob.

David Auld -- Chief Executive Officer and President

We're going to adjust to the market if affordability continues to drive. We're going to meet the market where we need to. The best thing that can happen for homebuilding is a strong economy and job creation. So, given those two things, we will figure out what [Inaudible] houses.

I can guarantee it.

Bob Wetenhall -- RBC -- Analyst

Lot of confidence. Thanks again. Good luck.

Operator

Thank you. Our next question today is coming from Carl Reichardt from BTIG. Please proceed with your question.

Carl Reichardt -- BTIG -- Analyst

Good morning, guys. I want to [Inaudible] a little bit about store count for next year. You are I think relatively flat on community count this year but absorptions were up, particularly well back half. As you look out to next year, do you expect to increase that store count a little bit more and that be more of a driver of order growth to support delivery volume or will it continue to be absorption?

Jessica Hansen -- Vice President, Investor Relations

Carl, one of the hardest things for us to predict and, as I remind everyone, I think every quarter. That's why we don't give specific guidance regarding community count by our community count was up 2% year over year outside to finish the year out. It was actually down 1% sequentially. So, as we look and move through fiscal 2018, we really expect it to be flat, no more than slightly up.

So, a continued story of absorption maybe with a little bit of community count growth to drive that 10% to 15% increase in the units this year.

Carl Reichardt -- BTIG -- Analyst

Okay. Thanks, Jessica. And then, Bill, just a clarification question on cash flow for Q4 better than you expected and you said part of that was due to a lack of ability to develop, so not spend a due to hurricanes and then also some additional closings. Can you sort of parse out for me the dollars associated with each of those two elements in terms what came in better versus what didn't happen and would go into Q1 or later quarters? Thanks.

Bill Wheat -- Chief Financial Officer and Executive Vice President

I don't have the specific dollars in front of me, Carl, here but the delta on the closing side, we provided revised guidance and in mid-September of about 85% backlog conversion. Our operators were able to [Inaudible] deliver on that in late September and we delivered 87%. So, that 2% change in conversion rate would be the delta on the closing side. The remainder would be less spending on inventory primarily in the land development side, a little bit of land back as well as primarily in the areas affected by the hurricane that was certainly a slowdown and some disruption in activity there and that was a little bit greater than we anticipated.

So, the remainder of that cash flow delta would come from our land activity. We would have expected our annual land spend and development spend to be a bit higher than it was. So, clearly that's a timing thing that does slide into 2018 but even with that, we still expect to exceed 500 million dollars of cash flow from operations in 2018.

Carl Reichardt -- BTIG -- Analyst

All right, thanks, Bill. Great job, guys.

Operator

Thanks. Our next question today is coming from Mike Rehaut from JPMorgan. Please proceed with your question.

Mike Rehaut -- JPMorgan Chase -- Analyst

Thanks. Good morning, everyone, and congrats again on Forestar, completing that transaction. A couple of questions around that. obviously, that's kind of been the primary focus of investors and how that kind of reshapes your company over the next few years or perhaps continues on your current path of more optioning and better returns.

When you talk about the operating cash flow outlook for 2018 of 500 million which I think is up from your prior guidance of 300 to 500 million, it seems like part of that is due to the Forestar shift, if I'm thinking about it right, with the 400 million of capital expected to be of Forestar to use for D. R. Horton sourced deals. So, just trying to get a sense of maybe what the operating cash flow would look like if you netted out the Forestar investment.

Is it as simple as 500 minus 400? I know you talked about some recycling of cash as well from Forestar. I guess that's my third question.

David Auld -- Chief Executive Officer and President

Mike, I think, looking at the 400 million we expect Forestar to commit in 2018, not all of that will be spent in 2018. That's a commitment to those projects as they develop and execute over time. Some of that will be spent in 2018, some of it in 2019. So, it's not all 400 is going to go on when you start a project.

The other part of it is that Forestar does have current portfolio projects, a lot of lots and contract to builders to sell. Over the next 12 months, they'll be continuing to deliver lots to those builders which will free up more capital to continue developing some of their existing projects as well as investing in net new projects for the Forestar program. So, we're still working out the exact capital needs Forestar is going to have and I expect to get more of that information back to you in 2018.

Mike Rehaut -- JPMorgan Chase -- Analyst

Okay, I appreciate that. Obviously, looking forward to that. I guess, secondly, you also mentioned that even after the first month or so that it looked like you could exceed some of the projections for Forestar that you originally filed, you had in your June presentation and looking at that presentation, for example, if you take you know like a 2020 snapshot of those slides where you said Forestar could have lot deliveries of a little over 7000 versus maybe around 1000 in 2018. Just trying to get a sense of what that upside might be.

You've already noted that you've provided 15 sourced deals to Forestar of which two have already closed and in the assumption set from the presentation, I think it was slide ten, you said that the assumption there would be 8 projects for Forestar in the first year. So, I assume obviously we're not talking about a doubling of the projections but just trying to get a sense perhaps of what the upside might be.

Bill Wheat -- Chief Financial Officer and Executive Vice President

We're still working with the Forestar guys to figure out exactly what those projections ought to look like. We are optimistic about the numbers we [Inaudible] in our June deck that we're seeing a greater deal flow that will give us an ability to exceed these numbers. It's hard to sit here today and quantify that exactly but we are seeing the deal flow that we expect will be greater than what we anticipated for these projections. Doubling, probably a little too aggressive to say it's going to double at this point but we're working hard to find every opportunity that makes sense and [Inaudible] for Forestar.

Mike Rehaut -- JPMorgan Chase -- Analyst

Great. Thank you.

Bill Wheat -- Chief Financial Officer and Executive Vice President

Thanks, Mike.

Operator

Thank you. Our next question today is coming from Ken Zener from KeyBanc Capital Markets. Your line is now live.

Ken Zener -- Keybanc -- Analyst

Good morning, everybody.

Jessica Hansen -- Vice President, Investor Relations

Good morning.

Ken Zener -- Keybanc -- Analyst

So, one of the things that we always talk about is the pace that you talked about your community count. Well, I'd like to focus on your units under construction in the [Inaudible] September and how you made the choice to not cycle down as much, [Inaudible] seasonally which really gives you this higher entry point [Inaudible]. Is there any particular reason, and I think that's what's really different about your business model versus other builders, you do build all the [Inaudible]. Looking at this year, you're up 13% year over year versus last year's 17% [Inaudible] in both cases.

Is there something happening this year versus last year in terms of construction or your regional mix that's kind of keeping that 26,000 change number at a lower growth rate than you had last year?

David Auld -- Chief Executive Officer and President

I wouldn't say there's anything different than what we've done. We're just positioning to grow the company and I do think that when you get to a certain size, the positioning has taken a little bit longer. So, we purposely put more inventory out, started more inventory light in Q4 to be positioned for what we [Inaudible] to be very good spring selling market.

Bill Wheat -- Chief Financial Officer and Executive Vice President

And, Ken, to your [Inaudible], I think we entered fiscal 2016 probably a little lighter than we would have liked to have been in housing inventory for the market that we saw in front of us. So, as we grew our year over year yearend inventory position 2015 to 2016 pretty aggressively and we're glad we did sort of take advantage of that in 2016, growth from 2016 to 2017 is moderate a little bit from that prior your growth because we were better positioned to start 2016. We're better positioned [Inaudible] to start 2016 than we were 2016. So, that gave us less need to add inventory but we still feel with the units we have on hand right now, 26,300, we feel great about that positioning going into 2018.

Jessica Hansen -- Vice President, Investor Relations

And just for reference, our overall housing inventory is up to 13%. Our [Inaudible] count is actually up 17% going into the year which we feel very good about.

Ken Zener -- Keybanc -- Analyst

Okay. And if I could use that segue in terms of spring selling, we approach this seasonally, over the last few years your pace, if you look back over the long term, it appears your pace usually saw 15% to 18% in the December quarter but in the last few years, it's been either up or down single digit which is a big change. That provides a lot greater [Inaudible]. Can you talk about what your base outlook is for spring selling? I realize you don't know the exact numbers but just on a seasonal basis, what do you expect that to be historically?

Jessica Hansen -- Vice President, Investor Relations

It will align with what we're trying to drive from a closing perspective which is the only number we actually guide to but if you look at it, generally speaking, we typically see a very sharp increase from December to March. Although the September December is relatively flat, slightly up to slightly down, typically December to March we would expect to see at least [Inaudible] 50% increase in our sales to kind of feel good about where the spring's headed.

David Auld -- Chief Executive Officer and President

A lot of it has to do without how you're positioned too, where the houses are, what communities, what submarkets. So, I can tell you that right now we feel very good about our positioning this year and I think it's the best we've done positioning for the fiscal year out of the last three.

Jessica Hansen -- Vice President, Investor Relations

Houses and [Inaudible] lots.

David Auld -- Chief Executive Officer and President

Yes.

Ken Zener -- Keybanc -- Analyst

Thank you.

Operator

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

Buck Horne -- Raymond James -- Analyst

Hey, thanks. Good morning. I was curious about kind of the option land market at this point. Not all options, I guess, are structured the same.

So, I guess I'm curious in terms of what are the typical terms you're able to negotiate in today's market whether it's percentage of cash down, take down to [Inaudible] till the time you're able to get this locked up. Just wondering kind of how far out on the time horizon you're able to control land in this [Inaudible] environment.

Mike Murray -- Senior Vice President, Business Development

That's the deal-by-deal situation. On average, we've got about 5% deposit up for remaining purchase price. Some of the projects we control 18 months, 24 months' supply. Others, we control three or five years' worth of supply in a given project and it varies.

There's certainly some we put up more than 5%, others less than 5% to arrive at that average. We work very hard at developing those relationships with the developer community, key business partners for us in all of our markets. Our division presidents are land acquisition professionals, work very hard to understand their developers and their market and who they need to partner with to get a lot put on the ground and then be a good partner to those developers.

And just in terms of hard cost increases or inflation rates, just kind of what are the trends you're seeing in terms of materials, lumber, concrete and the like in terms of cost increases going into 2018 and also the labor situation. Any comments you have on skilled labor availability and wage rates you're seeing [Inaudible] into the markets right now.

Jessica Hansen -- Vice President, Investor Relations

In terms of our cost per square foot that we typically talk about, our revenues once again outpace our stick and brick cost on a year over year basis. We did see a slightly higher increase in both our revenues per square foot and our stick and brick per square foot than the first three quarters [Inaudible] a year but that really was just driven by the closings [Inaudible] that Mike mentioned in our scripted comments because we had a higher percentage of our closing coming from the west. So, I'd say really we're just seeing more of the same. If you take out the closings next, we're seeing very minor increase in our revenues, just enough to cover our stick and brick increase.

And then the reason you're not seeing that flow through an increased gross margin is we continue to have a little bit higher land costs flowing through as well.

Buck Horne -- Raymond James -- Analyst

Okay, thanks, guys. congrats.

Operator

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

Stephen Kim -- Evercore ISI -- Analyst

Yeah, thanks very much, guys, and congratulations on a really strong quarter and a good end to the year. My first question relates to economies of scale. Certainly, it is apparent from your results over the last few years, if not longer, that there is a substantive difference in terms of how you're able to translate a given level of demand on the ground up to shareholder value and it seems that there are economies of scale that maybe weren't really fully realized or realizable 10 years ago or 15 years ago. And I was curious if you could just talk about what kinds of things have changed at the corporate level in the way you're managing your business to extract and drive these economies of scale and if all of the market them are at the local level or if you've been able to achieve meaningful ones at the national level?

David Auld -- Chief Executive Officer and President

During the downturn we all had to get a lot better and look at everything we were doing and try to figure out how we could do with a little less people a little more efficiently and a little better or a lot better and the key operators in this company went through that downturn, very painful experience, don't want to go through it again. So, we strive every day to get a little better at everything we do I think that has helped and it's created a different operating mindset today than we did in 2006.

Bill Wheat -- Chief Financial Officer and Executive Vice President

I think, Stephen, I've to add to that. Just kind of overall part of the ability to approach the business differently does come to our balance sheet structure and we're operating at a significantly lower leverage level than we did last time that we were at this scale and that's important. It does reduce our cost structure, it reduces the risk profile significantly and then our approach to land, we're being more patient there, moving more toward option and having a lower risk land strategy but also more efficient higher return strategy that allows us to still generate cash flow while growing is a significantly different position than we were at the last time we were to scale. So, we like our position but we still see obviously plenty of opportunities to continue to improve on it from where are.

Stephen Kim -- Evercore ISI -- Analyst

Got it. Okay, second question is on the M&A landscape. You said two things that I found particularly interesting. I think, David, you said that you at acquisitions pretty much the same as you look at a piece of land and I think you also mentioned that you preferred smaller tuck-in deals.

So, I just wanted to ask a couple of questions regarding those two points. So, one is regarding looking at acquisition of a piece of land. Generally speaking, we thought that company such as yourself typically don't like to pay a lot about book value for the acquisitions you look at similar to the way you look at a piece of land. I mean, that's where most of the opportunities [Inaudible] arise from is there's a landholding.

So, could you talk about what characteristics in an acquisition would encourage you to pay substantially above book value? And then regarding the smaller tuck-in deals, why smaller ones? Is there something about the difficulty to integrate a large deal that concerns you because I would think the competition for the smaller deals would be greater than for the larger deals, particularly with the Asian companies recently on the [Inaudible] valuations for the smaller deals are kind of getting pushed up. So, can you just sort of describe your preference for these smaller deals and what the pipeline looks like compared to last year or the year before?

David Auld -- Chief Executive Officer and President

To start with the end, I'd say the pipeline is probably a little longer today than it was a year ago and what we're looking for is not necessarily smaller or bigger but something that that is additive to our company that we can take and grow or integrate some of the things they're doing or the people that they have that make us better. First thing we look at it any acquisition is culture of the company and if the culture is not aligned, the people aren't going to be aligned, it's typically not a great deal for us. The next thing we look about is what kind of premium we got to pay and can we earn that premium back in two years and if we can't, the deal structure is probably not right for us.

Mike Murray -- Senior Vice President, Business Development

With the current platform we have, we're not motivated to pay a big premium for anything that we couldn't otherwise do yourself. As David said before, it's not something that's going to make our company better. It's probably something that we would be better off to spend our time and effort focused on a different area. I guess, the only thing that would motivate us to want to pay a significant premium over book value would be to end my career at Horton.

That would pretty much do it, I think.

Jessica Hansen -- Vice President, Investor Relations

We don't see any lack of communities to grow our business organically at the pace we want to grow that today. So, it puts us in a very strong position that there's no deal we have to go do to hit our growth target.

Stephen Kim -- Evercore ISI -- Analyst

All right, that's helpful. Just to translate, when you said the pipeline is a little longer than it used to be, does that mean that it is more chockfull of acquisitions that are of interest or the opposite?

Mike Murray -- Senior Vice President, Business Development

No, there are plenty of acquisition opportunities that we're evaluating to determine interest on. I mean, it's the way it's kind of continued to be for the last several years and it's been people that [Inaudible] longer, the cycle has performed well, the industry has performed well, more and more people have a confidence that they feel like they can price their company comfortable and a lot of private builder situations. The principles, the individuals running it day to day to day are three to five years older than they were three to five years ago. So, their perspective and outlook potentially may be changing.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, it's a common malady. All right, guys. Thanks very much.

David Auld -- Chief Executive Officer and President

Our [Inaudible] is not very good.

Stephen Kim -- Evercore ISI -- Analyst

All right, guys, congratulations, and thanks very much.

Operator

Thanks. Your next question today is coming from Jack Micenko from SIG. Please proceed with your question.

Jack Micenko -- SIG -- Analyst

Good morning. First question, looking at your southeast operations, it looks like you did a bit better certainly than some of the peers who are pointed out a lot of disruption with some of the storms. Curious what would you attribute that [Inaudible] performance to.

David Auld -- Chief Executive Officer and President

Yeah, that is platform. It is people. We've got a great position there. There was an impact.

There's no doubt there was an impact. There's was a disruption from hurricanes but we have a lot of hard-working people that worked their way through it.

Jack Micenko -- SIG -- Analyst

Okay. And then stepping back a bit, you're going to generate a ton of cash. Your land strategy is moving to be more capital efficient. Kind of [Inaudible] we're not going to see outsized buybacks at least for the next couple of years.

I'm just curious how do we think about or how do you think about improving return on equity? What am I missing in this cash build and equity build? I think book value is up 13% or 14% year over year. Is there more to squeeze out of operations? Where does the ROE improvement come from for so much cash build?

Bill Wheat -- Chief Financial Officer and Executive Vice President

There's always room to improve our operations. We will continue to improve on that and we are focused on return on equity as well but our primary driver right now of return on equity is to continue to drive a stronger ROI and we do expect to continue to grow revenues faster than our inventory growth to drive that. And then we're at the beginning stages of beginning to repurchase shares that will also provide an element of improvement to return on equity over time but we're going to walk before we run, we're going to begin by taking the steps toward offsetting our dilution and when we've achieved that, then we'll see where we are and we'll take the next steps from there. Clearly, we believe that longer term we have significant cash flow generation opportunities that will give us a lot of flexibility down the line but for the window that we see the next two to three years, we believe we're comfortable today.

Jessica Hansen -- Vice President, Investor Relations

We actually have added a return on equity slide after our return on inventory showing the ROE while reducing leverage and pretty dramatically it has improved from 11.8% in fiscal 2014 to 14.4% in fiscal 2017. It's improving along with our ROI while we're delivering.

Bill Wheat -- Chief Financial Officer and Executive Vice President

And we do expect to [Inaudible].

Jack Micenko -- SIG -- Analyst

Bill, do have a leverage target? I mean, you got to the 2.4, you're going to refinance the 400 in 2018 you suggested. Is there a leverage ratio that we should think about going out to 2020?

Bill Wheat -- Chief Financial Officer and Executive Vice President

No specific leverage ratio. We expect our leverage ratio to continue to draw from now through 2020. We expect to keep our debt level relatively flat this year by refinancing but our leverage ratio will drop this year and then I'd expect that ratio to continue to drop through 2020 while also then increasing our dividends and increasing our share repurchase and growing our business. That's the approach we're taking.

Jack Micenko -- SIG -- Analyst

Okay, thanks.

Operator

Thank you. Our final question today is coming from Dan Oppenheim from UBS. Please proceed with your question.

Dan Oppenheim -- UBS -- Analyst

Thanks very much. I was wondering if you can talk a little bit more in terms of the success you've had with Express Homes and the Southwest. You're getting back to prior peak volumes but the Southwest is basically 22% of the prior peak [Inaudible] point where we're seeing obviously loan limit is a real challenge in terms of markets. As you think about the gradual easing of credit and FHA and VA loans coming down slightly [Inaudible] has been, do you see more potential there in terms of just greater share of closing coming from there? How are you thinking about that in terms of future investment?

David Auld -- Chief Executive Officer and President

We think that [Inaudible] Southwest which has really driven the Southwest region is going to continue to outperform. We're incredibly well positioned there, made some very strategic acquisitions on the land lot side a couple of years ago. The operating team out there is going to reset in conjunction with those and right now we got an all-star team running that division with the incredibly well-positioned lots. So, our expectation is we're going to see continued growth in Southwest and they will get back to their feet at some point.

Dan Oppenheim -- UBS -- Analyst

Okay, thanks very much.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

David Auld -- Chief Executive Officer and President

Thank you, Kevin. We appreciate everyone's time on the call today and look forward to speaking with you again in January to share our Q1 results and a special thank you to the D. R. Horton team and a tough Q4 because of weather.

You did an outstanding job delivering the 2017 and even better job of positioning for 2018. You're the best in the industry and we thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your patience today.

Duration: 76 minutes

Call Participants:

Jessica Hansen -- Vice President, Investor Relations

David Auld -- Chief Executive Officer and President

Mike Murray -- Senior Vice President, Business Development

Bill Wheat -- Chief Financial Officer and Executive Vice President

John Lovallo -- Bank of America -- Analyst

Alan Ratner -- Zelman -- Analyst

Stephen East -- Wells Fargo -- Analyst

Bob Wetenhall -- RBC -- Analyst

Carl Reichardt -- BTIG -- Analyst

Mike Rehaut -- JPMorgan Chase -- Analyst

Ken Zener -- Keybanc -- Analyst

Buck Horne -- Raymond James -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Jack Micenko -- SIG -- Analyst

Dan Oppenheim -- UBS -- Analyst

More DHI analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.