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D.R. Horton Inc (DHI 0.10%)
Q4Â 2018 Earnings Conference Call
Nov. 08, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to D.R. Horton, America's Builder, the largest builder in the United States, Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you, you may begin.
Jessica Hansen -- Vice President, Investor Relations
Thank you, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2018 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 could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and in our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-K next week. After this call, we will post updated supplementary data to our Investor Relations site on the presentation section under News & Events for your reference. The supplementary information includes our previously released data on changes in active selling communities and brand stratification, updated also include the data on our homebuilding return on inventory, home sales gross margin, price stratification and our mortgage operations.
Now I will turn the call over to David Auld, our President and CEO.
David Auld -- President and Chief Executive Officer
Thank you, Jessica, and good morning. In addition to Jessica, I am 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 the year strong, pre-tax income for the fourth quarter increased 25% to $608 million, on $4.5 billion of revenue and our pre-tax operating margin improved 180 basis points to 13.5%. For the year, we delivered results in line with or better than the original fiscal 2018 guidance, we shared at the beginning of the year. With consolidated pre-tax income increasing 29% to $2.1 billion on $16.1 billion of revenues. We closed 51,857 homes this year, an increase of 6,106 homes, or 13% over last year.
Our consolidated pre-tax margin for the year improved 140 basis points to 12.8% and our homebuilding return on inventory improved 360 basis points to 20.2%. Our homebuilding cash flow from operations was $1 billion in 2018. Our fourth consecutive year of generating positive operating cash flows during a period, when our annual revenues have doubled. These results reflect the strength of our operational teams, our ability to leverage deal scale across our broad geographic footprint and our product positioning to offer affordable homes across multiple brands.
Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across all of our markets, and economic fundamentals and financing availability remain solid. We are pleased with our current product offerings and positioning to meet demand in the current market and we will adjust to future changes in market conditions as necessary.
Our strategic focus is to continue consolidate market share, while growing both our revenue and pre-tax profits, generating strong cash flows and returns and maintaining a flexible financial position. With a conservative balance sheet that includes 29,700 homes in inventory and an ample supply of owned and optioned lots to support future growth, we are well-positioned as we begin 2019. Mike?
Michael Murray -- Executive Vice President and Chief Operating Officer
Net income for the fourth quarter increased 49% to $466 million, or $1.22 per diluted share compared to $313 million, or $0.82 per diluted share in the prior year quarter. Net income for the fourth quarter included tax benefit of $16.1 million due to the reversal for the portion of Forestar's valuation allowance on deferred tax assets.
Our consolidated pre-tax income increased 25% to $608 million in the fourth quarter from $486 million. And homebuilding pre-tax income increased 26% to $578 million from $458 million. As previously reported, our fourth quarter home sales revenues increased 9% to $4.4 billion on 14,674 homes closed, up from $4 billion on 13,165 homes closed in the year ago quarter.
Our backlog conversion rate for the fourth quarter was 89%, up from 87% a year ago. Our average closing price for the quarter was $298,500, down 3% from the prior year, primarily due to geographic mix and a 3% decrease in the average size of our homes closed, which reflects our efforts to keep our homes affordable. Bill?
Bill Wheat -- Executive Vice President and Chief Financial Officer
As also previously reported, our net sales orders in the fourth quarter increased 11% from the year ago quarter to 11,509 homes on a 3% decline in the average number of active selling communities. The value of homes sold during the quarter increased 10% to $3.4 billion. Our average sales price on net sales orders decreased 1% to $298,100 and our fourth quarter cancellation rate was 26%. Jessica?
Jessica Hansen -- Vice President, Investor Relations
Our gross profit margin on home sales revenue in the fourth quarter was 21.6%, up 130 basis points from the prior year quarter, 70 basis points of the year-over-year increase in gross margin was due to reducing incentives, or raising sales prices in excess of cost increases, 30 basis points was from less warranty and construction defect costs, 20 basis points was from lower interest costs and 10 basis points was from less impact from purchase accounting.
Home sales gross margin declined slightly from 21.9% in the third quarter, primarily due to the average cost of our homes increasing by more than the average selling price. We continue to focus on achieving our targeted absorptions to maximize returns in each of our communities because the consistent pace of start, sales and closings with the right product positioning drives both the highest returns and pre-tax profit margin.
Our fiscal 2019 home sales gross margin will be determined primarily by the strength of the spring selling season. We currently expect our home sales gross margins in fiscal 2019 to range from 20% to 22% with potential quarterly fluctuations outside of this range due to product and geographic mix as well as the relative impact of warranty, litigation, interest cost and purchase accounting. We will update our expectations as necessary each quarter as we have better visibility to the spring and the full year comes in focus. Bill?
Bill Wheat -- Executive Vice President and Chief Financial Officer
In the fourth quarter, SG&A expense as a percentage of homebuilding revenues was 8.4%, down 20 basis points from the prior year quarter. For the full year, homebuilding SG&A improved 30 basis points to 8.6% compared to 8.9% in 2017, 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 2019. Jessica?
Jessica Hansen -- Vice President, Investor Relations
Financial services pre-tax income in the fourth quarter was $33.8 million and the pre-tax operating margin was 33.1%. For the year, financial services pre-tax income was $118 million on $375 million of revenues, representing a 31.4% pre-tax operating margin. 98% 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 56% of our home buyers. FHA and VA loans accounted for 43% of the mortgage company's volume.
Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721, and average loan to value ratio of 88%. First-time home buyers represented 49% of the closings handled by our mortgage company, up from 44% in the prior quarter, reflecting our continued focus on offering affordable homes for entry-level buyers. Mike?
Michael Murray -- Executive Vice President and Chief Operating Officer
We ended the year with 29,700 homes in inventory, 16,400 of our total homes were unsold of which 4,000 were completed, which is down slightly from last year. Compared to year ago, we have 13% more total homes in inventory, putting us in a very strong position to start 2019. Our fourth quarter homebuilding investments in lots, land and development totaled $1 billion of which $615 million was to replenish finished lots and land, and $432 million was for land development. For the year, we invested $3.8 billion in lots, land and development. David?
David Auld -- President and Chief Executive Officer
We are making good progress on increasing the option portion of our land and lot pipeline and believe we can continue to increase our option lots over the next few years, while maintaining our number of owned lots relatively flat with current levels. At September 30th, our land and lot portfolio consisted of 289,000 lots, of which 125,000, or 43% are owned and 164,000, or 57% are controlled through option contracts.
35,000 of our total owned lots are finished and 82,000 of our option lots are or will be finished, when we purchase it. We have increased our option lot position by 40,000 lots from a year ago and we plan to increase our option lots further by expanding our relationship with lot developers across the country and continuing to support the expansion of Forestar's national lot manufacturing platform. Our balanced and well positioned lot portfolio is a strong competitive advantage. Mike?
Michael Murray -- Executive Vice President and Chief Operating Officer
Forestar, a majority-owned subsidiary is a publicly traded residential lot development company now operating in 24 markets and 14 states. At September 30th, Forestar only controlled approximately 20,100 lots of which 1,600 are finished, 13,600 Forestar's lots are under contract with D.R. Horton were subject to a right of first offer under the master supply agreement between our two companies.
Forestar delivered 1,279 lots and generated $109 million of revenue for the 12 months ended September 30th. Our growth expectations for Forestar are consistent with what we have shared on prior calls. Forestar is still on track to grow annual deliveries to approximately 10,000 lots, generating $700 million to $800 million of revenue in fiscal 2020. We expect Forestar to be consistently profitable with future pre-tax margins of at least 10%. These expectations are for Forestar's stand-alone results.
Forestar is making steady progress in building its operational platform and capital structure, supported significant growth plans. During the quarter, Forestar obtained in three-year $380 million unsecured bank credit facility and completed following the shelf registration statement, which is now effective. Forestar still plans to access the capital markets in fiscal 2019 to provide additional capital for long-term growth. However, Forestar's current liquidity, capital base and lot position are sufficient to support its fiscal 2019 and 2020 planned growth in lot deliveries in revenues. Forestar is separately capitalized from D. R. Horton and is targeting a long-term net debt to capital ratio of 40% or less.
D. R. Horton alignment with Forestar is advancing our strategy of increasing access to option lot positions and enhancing our operational efficiency and homebuilding returns. We are excited about Forestar's growing operating platform and the value of this relationship will create over the long term for both D. R. Horton and Forestar shareholders. Bill?
Bill Wheat -- Executive Vice President and Chief Financial Officer
At September 30th, our homebuilding liquidity totaled $2.3 billion, consisting of $1.1 billion of unrestricted homebuilding cash and $1.2 billion of available capacity on our revolving credit facility. Our homebuilding leverage improved 260 basis points from a year ago to 21.4%. The balance of our homebuilding public notes outstanding at fiscal year-end was $2.4 billion. And we have a total of $500 million of senior notes that mature in March 2019, which we will likely repay from cash flow and maturity.
Our consolidated cash flow from operations was $239 million during the fourth quarter and $545 million for the full year. Excluding Forestar, our fiscal 2018 cash flow from operations totaled $875 million exceeding our publicly stated $800 million target. Fiscal 2018 homebuilding cash flow from operations was $1 billion.
During the September quarter, we paid cash dividends of $47.1 million and we repurchased approximately 1.2 million shares of our common stock for $52.6 million. We ended the year with shareholders' equity balance of $9 billion and book value per share increased 16% from a year ago to $23.88. Based on our financial position and outlook for fiscal 2019, our Board of Directors increased our quarterly cash dividend by 20% to $0.15 per share. We currently expect to pay dividends of approximately $225 million to our shareholders in fiscal 2019 and our remaining stock repurchase authorization for fiscal 2019 is $376 million. David?
David Auld -- President and Chief Executive Officer
Our balanced capital approach focuses on being flexible, opportunistic and disciplined. Our balance sheet strength, liquidity, earnings growth and cash flow generation are increasing our flexibility and we plan to utilize our strong position to enhance 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 homebuilding debt and return capital to our shareholders through dividends and share repurchases.
As we mentioned on our last call, we have been actively pursuing select homebuilding acquisitions across the country and we still expect to deploy $400 million to $600 million of capital for this purpose over the next few quarters. Jessica?
Jessica Hansen -- Vice President, Investor Relations
Looking forward for the first quarter of 2019, we expect consolidated revenues of $3.3 billion to $3.5 billion and our homes closed to be in a range between 11,000 and 11,500 homes. We anticipate that our first quarter consolidated pre-tax margin will be in the range of 11.4% to 11.7%. Our full-year fiscal 2019 results will be significantly impacted by the spring selling season. Due uncertainty based on recent market conditions, we are only providing first quarter revenue closings and pre-tax margin guidance at this time. However, we are well positioned to deliver double-digit growth in fiscal 2019 subject to the strength of the spring selling season.
We will update our expectations each quarter as we have better visibility to the spring. We still forecast an income tax rate for 2019 of approximately 25% and we expect our outstanding share count at the end of fiscal 2019 will be flat with our outstanding share count at the end of fiscal 2018. We also expect to generate homebuilding cash flow from operations of at least $1 billion in fiscal 2019. David?
David Auld -- President and Chief Executive Officer
In closing, the strength of our team and operating platform across the country, allowed us to grow our revenues 14% and our pre-tax profit is 29%, while generating $1 billion of homebuilding cash flow from operations. We also improved our annual homebuilding return on inventory by 360 basis points to 20.2%.
We are focused on consolidating market share, while growing both our revenue and pre-tax profits generating strong cash flows and returns, while maintaining a flexible financial position. We are well positioned to do so with our conservative balance sheet, industry-leading market share, broad geographic footprint, affordable product offering across multiple brands, attractive finished lot and land position, and most importantly, our outstanding experienced team across country.
We congratulate the entire D.R. Horton team on our 17th 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 2019. This concludes our prepared remarks, we will now host questions.
Questions and Answers:
Operator
At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Carl Reichardt with BTIG. Please proceed with your question.
Carl Reichardt -- BTIG -- Analyst
Good morning all. Good to talk to you. I wanted to ask a little bit about the impact of weather on your 4Q hurricanes, et cetera, is that impacted covering the fixed portion of your COGS and SG&A?
Bill Wheat -- Executive Vice President and Chief Financial Officer
Yes, certainly there was some impact from the hurricanes in September on our closings. One of the reasons, why we pre-reported our closings and anytime we fall a bit short of our plans on our revenue line, our leverage on SG&A, it is impacted. And I would say that's the primary reason, why our SG&A came in higher than we had guided for the quarter.
Jessica Hansen -- Vice President, Investor Relations
And we don't actually have any fixed cost in our cost of goods, so the gross margin was not impacted by the hurricanes.
Carl Reichardt -- BTIG -- Analyst
Okay, thanks. And then in terms of your guidance for Q1, so a little bit below, what we were looking for. So, you had some delays that moved into that quarter. Is this really just a function of your expectation that backlog conversion goes down, or just sort of, as you look out orders feeling softer in an environment with higher rates and higher prices?
And then can you also talk a little bit about your incentive activity and what you're looking at in planning and whether or not incentives are having sort of an elastic. There is a reaction by the consumer that's elastic to your incentive. So, they're buying, when they see lower prices, or you have seen that you have to drop prices sort of more than you thought?
David Auld -- President and Chief Executive Officer
This is David. The market conditions really over the last four or five weeks have been pretty choppy. We haven't seen kind of the consistency at the flag to flag level that we have grown to expect, so you know, when you have the size we are, you kind of get a sense that maybe a little momentum is slipping from the market to you. You have a hard time driving the number of sales, it takes for us to grow double-digit.
So, I say Q1 yeah, we're giving you a good picture of where we are right now. Expectation lines, I can tell you, I believe we are positioned, as well as we have ever been. Our operators out there in the field, have plans to produce double-digit and we'll see what happens. Given some kind of -- any kind of market at all in the spring, I think, we're going to have a great year. But right now, we're -- it's been very few quarters we've had come in and release because we had given guidance and then fell a little bit short of it at the quarter. So, maybe part of it's our own conservative nature up here, yes. We don't want to put a number out there we can hit.
Michael Murray -- Executive Vice President and Chief Operating Officer
From an incentive standpoint, Carl, in the fourth quarter closings, we saw very slight sequential tick up in incentives from the third quarter to the fourth quarter, year-over-year incentives were still at a lower level in the fourth quarter than they had been historically. As we move forward, as we're in a more choppy environment as David said community by community, we're working to maximize return by community and in some cases if giving some incentive to increased pace or to maintain pace will improve returns we'll be doing that.
And so generally you would expect in the choppy environment for incentives to tick up a little bit, that's reflected in our guidance here for our margin expectations in Q1. But then we do believe fundamentals from the economy, from demographics, from housing fundamentals, especially at affordable price points is still very solid. And so our positioning billing (ph) great position for the spring selling season, but realistically right now, we were not to the spring, we don't have visibility to the spring yet. And so that's why we're maintaining a bit of flexibility here in terms of our forward guidance because we just don't have that visibility yet.
Carl Reichardt -- BTIG -- Analyst
All right. Thanks so much guys.
Operator
Our next question comes from the line of Stephen East with Wells Fargo. Please proceed with your question.
Stephen East -- Wells Fargo -- Analyst
Thank you and good morning. Just following on Carl's question a little bit. Are you seeing, are incentives working, or are they getting people to make the decision to buy. And I guess I'm wondering a bit, or is it more sticker shock, are you seeing at that entry level qualification becoming more problematic there. And this just on the orders, you know, by product you mentioned that entry level was better. But if you could give us a little better, a little bit more detail on what you're seeing at the various price categories, if you would?
David Auld -- President and Chief Executive Officer
Good morning, Stephen. It's only October, so it's really kind of hard to read in too much, but it has been choppy. I would say that our affordable price point flags, we continue to see good traffic and good demand. Incentives have probably not been as heavy at those levels. Anecdotally, we are seeing that in some of the higher price points, not a huge positioning for us. Less than about a third of our closings are coming from the price point, about $300,000 nationally.
That buyer is probably little bit affordably stretched and taking a little bit of time to reset to a changing mortgage rate environment and some of the media conditions. We're hopeful with the mid-terms are behind us that people can get back and focus on their lives and we'll be moving forward. But a lot of that's really going to play itself out over the next three months and we're excited to get the Super Bowl. Not because we're Calgary fans necessarily, but because that's typically when the selling season kicks off. And so that's really what we think we're going to see. And right now it's been choppy as we said.
Jessica Hansen -- Vice President, Investor Relations
And the price point really varies from market to market, but very generally speaking, Texas across the Florida up into the Carolinas, if you can put a house on the ground for a sales price under $300,000, we still see very robust demand the further west markets, call it under $400,000. Once again, very generally speaking, sub-markets have different dynamics, but generally speaking under $400,000 in the West. So, a lot of the new flags we have coming to market that we are behind on some of those legs getting opened, our focus on those price points.
Stephen East -- Wells Fargo -- Analyst
Okay, thanks a lot. And then along those lines, you really haven't had any community growth over the last three years, it's all been absorption growth. You're still pivoting toward that entry level, which I assume your Georgians will improve this year also that as you look forward in '19 and '20 to me it looks like you've got to get some community growth going to reach that double-digit type of growth rate, just what are you all expecting there, and am I my thinking about it the right way?
David Auld -- President and Chief Executive Officer
You're exact are thinking about exactly right. And we've been frankly planning for community count to be more stable or slightly growing for the past 18 months. We got two dynamics in play one (ph) a communities are running at faster absorption than we probably expected. And so we were closing other communities faster and then frankly it's taking us longer than we anticipated to get communities open and we have continued to respond to the challenges we face and try to adjust our business plan to reflect the realities that we face in communities through planning, through approvals and through development. But it has taken us longer to get the new ones open and the ones that are open are selling at faster clips than we probably anticipated. So, it's a function of two things on the community counts. We would expect to see community count stabilize and trend up in '19.
Jessica Hansen -- Vice President, Investor Relations
And we have the lot to show that is going to happen. David mentioned our option lot position is at 40,000 lots from a year ago. So, that is the direction the communities will come over time.
Michael Murray -- Executive Vice President and Chief Operating Officer
And Stephen, we did believe we will be growing community count last year and really just couldn't get to communities online. So, but that is certainly in the plan for 2019.
Stephen East -- Wells Fargo -- Analyst
Okay, thanks a lot.
Operator
Our next question comes from the line of John Lovallo with Bank of America. Please proceed with your question.
John Lovallo -- Bank of America -- Analyst
Hey, guys. Thank you for taking my question. I guess, in terms of potential acquisitions, David, you mentioned, are you seeing a greater willingness for some of the smaller competitors to come to the table now. And I guess second, secondarily if you do pursue acquisitions, it seems like they would be kind of tuck-in type deals, and it wouldn't necessarily be a strain from the asset-light pieces (ph) is that correct?
David Auld -- President and Chief Executive Officer
I think you're going to pretty much see a continuation of what we have been doing. We are very interested in the culture and the ability to bring these companies into our company. So, the great big deals, heavy lab deals probably don't make a lot of sense to us right now. I can tell you the deals that were close -- closed one, very, very good companies, very good culture, people that I think will fit well within our company so. We'll see if we can get them done.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Okay, John, -- yeah willingness of potential buyers I take the ones that were closed on today are ones that we've been talking with for quite some time and working with for quite some time. But we would expect that going forward to the extent that there is a little more consistency in the market or that it -- we would probably see, expect to see some buyers are some potential sellers, have been more willingness to sell going forward.
Michael Murray -- Executive Vice President and Chief Operating Officer
Yeah, Bill mentioned we've been talking of these cash for quite some time. We really are serious about cultural the fit. So, it is a -- it is a courtship and the typical deals probably two years from the time we start to go on the close (ph) and one more working on right now.
John Lovallo -- Bank of America -- Analyst
Okay. What is it--
David Auld -- President and Chief Executive Officer
We're not going to rush. We're not going to rush OK?
John Lovallo -- Bank of America -- Analyst
Is this a shift the way from becoming using Forestar to become more asset light or is this part of the strategies will be?
David Auld -- President and Chief Executive Officer
No, this fits right in with that -- this has to do with market consolidation in a couple instances getting a platform in a new market.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Growing our platform in existing market, giving us more places to invest before start, right.
David Auld -- President and Chief Executive Officer
No. No, we are on track with our overall option lot growth, trying to become less reliant on self-developed land and lots that's not going to change.
John Lovallo -- Bank of America -- Analyst
Okay. And then maybe just following up on that, in terms of the capital raise on Forestar, I mean, there's obviously then market volatility and Forestar stock is pulled in a bit here. Has that affected your views on the timing of potential equity raise, and I know, you mentioned that it's pretty well -- Forestar is pretty well capitalized, but it does feel like the best time to raise the capital, but we really don't need it. So, any comments on that would be appreciated.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Yeah, sure. John, you know, this year, this past year, the effort has been to begin building the platform of Forestar and fortunately Forestar was very liquid and still is had a lot of cash on the balance sheet at the date of acquisition, have been sold some of their legacy assets over the course of the last year, raised a lot of capital and is still in a very liquid position here at September 30th, made a lot of progress on the capital structure standpoint, getting the bank credit facility in and a $380 million capacity provides significant capital flexibility there, to Forestar's as well. So, very pleased with their positioning.
All along, any plans for public the capital raising either as a debt or the equity markets will be subject to, to market conditions and timing. Forestar's is working to be in position to raise capital in fiscal '19, as the plan has been all along and the timing of that will be dependent on when we feel like the best market windows are.
Fortunately Forestar is in a very good position today with their capital, with the lot position to drive the growth targets that we've been talking about for fiscal '19 and '20, without raising additional capital. However, their plan is still to raise capital in fiscal '19. If we were to go to market today, I do agree with you the best time to raise capital, when you don't need it, and they don't need it right now. But if were to go to market today, we would, we would likely go to the debt market, given just where the equity markets have been recently. But the long-term plan for Forestar does still include both equity and debt and when market conditions are favorable for equity, equity is definitely part of the plan.
John Lovallo -- Bank of America -- Analyst
Okay. Thanks guys.
Operator
Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim -- Evercore ISI -- Analyst
Yeah, thanks a lot, guys. Good job in the quarter. Just wanted to ask a little bit about you're guiding the decision not to give the full year guide. I know you talked about the uncertainty in the market and wanted to wait until the spring selling season and so. In that regard, I wanted to ask about your 1Q guide, you gave at a pre-tax margin, you talked about gross margin for the full year, next year, 20% to 22% was, but you said that could be volatility outside of that range in 1Q, given your pre-tax guidance would seem like it might be a quarter, where you could go outside of that range. So, just want to make sure we're thinking about that right. Is it your belief that the margin in the 1Q for gross margin would be at or below that 20% range, is that kind of what we should be thinking about?
Jessica Hansen -- Vice President, Investor Relations
No, Steve, when we looked at that consolidated pre-tax profit margin range that incorporated our thought of 20% to 22% be in a range and 20% would be a pretty dramatic move from where we are today. So, we wouldn't expect that level of choppiness in our gross margin, as we move from quarter to quarter. But we do believe as we move throughout the year, until we see the spring, we don't ultimately know what gross margins will look like for the full year, so we wanted to give a slightly wider band than what we gave say a quarter or two ago.
Stephen Kim -- Evercore ISI -- Analyst
Okay. Yeah, that's encouraging. Thanks for that clarity. And then the second question relates just sort of generally to, but the market environment and your this asset allocation decisions. In particular, I'm wondering about land spend. So, was kind of running about 24% of rev this quarter and this past year. I was, again, given the uncertainty in the market and your decision to sort of wait until the spring selling season to give you sort of a good heads up on where the market is going to be going.
I was curious if we should expect land spend to similarly be put a bit on hold here in the first six months of the fiscal year, your fiscal year accordingly. And then also with respect to options, can you give us a sense for how take down prices are typically negotiated in your options? Are they set and fixed at the time you strike the option, or they are more flexible? And what percent of the purchase price your deposits typically constitute in aggregate right now?
David Auld -- President and Chief Executive Officer
Let me, this is David, let me speak to the land spend positioning. Right now, is my personal belief that we're going to -- we're going to continue to see double-digit growth in 2018. And we are continuing to position for that double-digit growth. What we've seen so far in October is, when we start putting numbers together, the range of possibilities become so broad, and so like it's meaningless to even put it out there. So, our look is Q1 and I believe anyway that we're going to have good year, we're going to continue to position to that now. When we get into the spring, if this choppiness that we're seeing now turns into -- continues or gets worse then, yes, our land spend, every spend is going to significantly curtail. But for right now today, we're not giving up on the year.
Jessica Hansen -- Vice President, Investor Relations
We don't ever make any drastic business decisions in October. October to December is always the seasonally slowest time of the year. And so we really want to wait and see what the spring looks like, before we make any -- any big business plan decisions.
Bill Wheat -- Executive Vice President and Chief Financial Officer
And then with your question as to the option pricing, those prices are generally struck at the time the option is entered into, typically there is an opening price for the initial takedowns. Oftentimes, there is a fixed rate escalator that will start running from the initial takedown until all the lots are taken down. Not in every case, sometimes it's there, maybe in a small minority of option contracts, or maybe some adjustment based upon pricing achieved with house, that's pretty rare these days. I believe the aggregate earns money deposit today is about 6% to remaining purchase price. So, that's sort of, I think that's a collection of a lot of -- lot purchase contracts of those are some generalizations and averages, that's kind of what's out there guiding us.
Stephen Kim -- Evercore ISI -- Analyst
Thanks. Mike, you said 6% of remaining purchase price. Just to make to be clear, so that include the project you already put down, I mean, you've got another 6%?
Michael Murray -- Executive Vice President and Chief Operating Officer
Yeah, that's -- so the 6% is what we have, we have put on deposit.
David Auld -- President and Chief Executive Officer
Total at risk.
Michael Murray -- Executive Vice President and Chief Operating Officer
Or the future lot purchase.
Stephen Kim -- Evercore ISI -- Analyst
Okay, got it. Perfect. Perfect. No, no, that was my confusion. Thank you very much guys.
David Auld -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Eric Bosshard with Cleveland Research Company. Please proceed with your question.
Eric Bosshard -- Cleveland Research Company -- Analyst
Thank you. I heard the commentary about the strength of demand in the two-thirds of your business, that's 300K and under, it sounds like, you're talking about the demand has softened in the upper third of your business and upper price points. We'd love to hear a little bit more color, if that's indeed, what you're seeing. And then, if you've seen anything change within that two-thirds of your business that's in the more entry price point piece of the market.
David Auld -- President and Chief Executive Officer
I think you would think it's the higher price points maybe interest rate impact the buyers less, but what we're seeing debt to income issues, when you get over that 300 and most of our markets, it just seems like FIR having a more difficult time getting qualified. And the housing valuations have been so good for so long that, you know, when people go and take a look at a house, they can -- two years ago, they can afford a much nicer house than they can today. So, there is kind of that sticker shock process going on. And as far as demand under 300, they are just not very much out there in any of the markets.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Supply. Supply.
David Auld -- President and Chief Executive Officer
Supply, yeah, not much. The demand is there, there is not much supply. So, even though demand maybe restricted by affordability, there are still more buyers out there then they are, they can afford it. Then there is product.
Jessica Hansen -- Vice President, Investor Relations
And financing availability is not the issue for those buyers, that really is the supply. We continue to see our credit metrics improve, even on our express buyers they utilize our mortgage company today. Their FICO scores continue to risen to this quarter at 710, compared to just our company average of 720. And our cumulative loan to value on those has actually ticked down slightly to 90 almost right in line with our company average. So, financing is there and there is just not homes on the ground for those price points for those buyers.
There is certainly we're seeing at the higher price points, there is more supply available relative to that demand that's there. So, the buyers have more choice, whether it's an existing homes or other new homes at the more affordable price points were communities are established and the sales process, the mortgage processes, their support that first time home buyer, that's what we're focused on opening flags and bringing those products to market.
I think about half of our mortgage company's closings this last quarter were to first-time home buyers. And so we're really pleased with what we're seeing there and that buyer is come in the market, they are, call it 10 years out of school now, they may have come out of school in '08, not the greatest time to start your career. And they've hit a point in their lives, whether if they are ready for home ownership and we're very excited to see them coming into the sales offices.
Eric Bosshard -- Cleveland Research Company -- Analyst
So, let me just ask the question a little bit more directly. Is the change that you're seeing in the upper third of your business, or are you also seeing a change in demand in the entry first time piece of your business, that's what I'm, I guess, I'm trying to figure out?
Bill Wheat -- Executive Vice President and Chief Financial Officer
Primarily at the upper end that's where we primarily see, have been seeing weakness and then recently, as David said last four, five, six weeks, it's just generally been choppy. But we would not necessarily say that's an indicator of any change in demand at the lower price points.
David Auld -- President and Chief Executive Officer
And maybe to answer just a little more directly. The person that came in three or four months ago at the below 300,000 price point. They could buy a 2200 square foot house. Today for that same payment, they are looking at maybe a 2018, 19 square foot house. They still want a house, they still need a house. Their expectation of, we've seen this every time there has been an increase in rates over a relatively short period of time. There is an adjustment time, where the reality and expectation have to realign. So, again there is no -- the alternatives are very, very limited. So, if they're going to buy a house, the demand is there, I guess is what I'm trying to say. It does create choppiness, it does create maybe a less consistent sales pace.
Bill Wheat -- Executive Vice President and Chief Financial Officer
So, what it really comes down to us is positioning. Every community, every market, positioning our homes, positioning the floor plans that we offer to make sure that they're that affordable payment for that core buyer in that -- in that market. If that means it's a smaller house or buyers are going to select more of a smaller floor plans. That's what we expect to see. In fact we started seeing that this quarter. Our average square footage on our homes closed this quarter was down 3% and so we are positioning ourselves to make sure that there is a buyer -- there is a home for that buyer that has had to reset their expectations.
Eric Bosshard -- Cleveland Research Company -- Analyst
That's helpful. Thank you.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.
Alan Ratner -- Zelman & Associates -- Analyst
Hey guys, good morning. So obviously, your business model, you mentioned previously, it really thrives, when you have a consistent pace of start, sales and closings. And last few years, all of those have been very consistent. So, I guess the question is, if the choppiness on the sales front continues, at what point do you actually adjust that start pace constraint. Now David, you mentioned you're still optimistic for double-digit growth for '19, So, is it not until the spring, where you start to really adjust your start pace or could it happen potentially sooner than that, if the next few months are also choppy?
David Auld -- President and Chief Executive Officer
Yeah, we really do look at sales week to week to week project by project. So, we have not made any adjustments so far. My expectation is in the last couple of years, we have seen especially after the 16 election, we saw sales pickup early and the spring market started in December. Not sure that I'm 100% bought in that we're going to see that same thing this year. But I can tell you it would not surprise me and it will again like Jessica says, we've seen about five or six weeks so far this year. That's not as in lot. But to answer your question, yes, we won't wait life to adjust our start.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Alan, I'd also like to point out that at the end of September, we had 4000 completed homes that were unsold, which is actually less than we had ending fiscal '17. So, we're still seeing, yeah, the projects working at the community level and we are monitoring week to week, community to community, our teams do a great job of staying on top of that. We have a plan for what they believe in it's happening in their sub markets and continuing to execute against that. We are taking market inputs and looking at the sales pace in every community to look at the start, but -- the sale to adjust the starts. But we watch it very closely, and we still believe we have positioned in our positioning for 2019.
Jessica Hansen -- Vice President, Investor Relations
And our division presidents are going to make sure, they're starting homes in the right communities. That's what they're adjusting on a day-to-day and week-to-week basis. It's putting the starts on the ground in the communities, where we're seeing either more consistent or a more robust demand and to meet the sales and demand that's out there.
David Auld -- President and Chief Executive Officer
Right.
Alan Ratner -- Zelman & Associates -- Analyst
Got it. I appreciate all that. I appreciate all that color.
David Auld -- President and Chief Executive Officer
We talk a lot about the right home, on the right line, at a right price.
Alan Ratner -- Zelman & Associates -- Analyst
I've got it. Okay. Thank you for that. So, second question, if I could just obviously it seems like there's a little bit more turmoil in the market today. We've heard from other builders as well. You guys, I think, have been running at a cost inflation rate somewhere in the low single-digit range. So, I guess, as you're having conversations with your trades, how those have been going, are you starting to see any relief there? Obviously lumber come down, but is it a situation, where cost inflation could actually slow here over the next several quarters, given the softness in demand?
Bill Wheat -- Executive Vice President and Chief Financial Officer
I think, we will be seeing that Alan. I think we are seeing some cost pressures alleviate a bit, which will be, -- what has been an headwind, certainly has been the tight labor market for construction and the lumber. I think we'll see that lumber become a bit of a tailwind probably into our late second quarter, third quarter deliveries, or second quarter and third quarter deliveries late first quarter potentially. And then we will see, I think, a little bit of labor moderate as others perhaps adjust their starts.
Alan Ratner -- Zelman & Associates -- Analyst
Got it. All right. Thanks, guys.
Operator
Our next question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your question.
Susan Maklari -- Credit Suisse Securities LLC -- Analyst
Thank you. Good morning. My first question is just around, can you talk to what you're seeing from the competitive perspective in the sense of maybe some of your private peers? Are you seeing them adjust at the similar rate to what's been going on in the last few weeks? Or how are they taking about the set up into the spring?
Bill Wheat -- Executive Vice President and Chief Financial Officer
It's hard to generalize with any one individual private homebuilder or any other builders, thinking about. But generally and this is from talking with a lot of private builders, their focus is generally not on returns. Their focus is generally margin, house to house to house and so they maybe a bit slower to respond to market conditions and others. They are also typically more focused on building homes to order rather than building homes to market demand and providing product, that's kind of more readily available for the entry level buyer.
Susan Maklari -- Credit Suisse Securities LLC -- Analyst
Okay. And then given some of the changes that we are seeing in the market, is there any change to how you're thinking about your capital allocation, especially maybe as it relates to your share repurchase activity?
Bill Wheat -- Executive Vice President and Chief Financial Officer
We've taken a balanced approach. Thus far, we have ample liquidity and flexibility to really still grow our business as well as continue to pay down debt and provide returned to shareholders through our dividends and our share repurchase. We have been incrementally increasing our share repurchases, and we expect to incrementally increase them further this year to offset our share price or share creek(ph). So, they will keep our outstanding share count at least flat, no more than flat this year. But we do have room to be opportunistic. With our authorization, we have room to be opportunistic there as well, and so we will balance the opportunities in our potential share repurchases alongside other opportunities as well.
Jessica Hansen -- Vice President, Investor Relations
And we plan to continue to reduce our debt as we said in the scripted comments that $500 million maturity this March. We believe that the lower interest costs in our business really are our competitive advantage and as we continue to pay down debt, that's just one more tailwind to help us offset cost pressures in our gross margin.
Susan Maklari -- Credit Suisse Securities LLC -- Analyst
Okay, thank you.
Operator
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Michael Rehaut -- JPMorgan -- Analyst
Thanks. Good morning everyone, and thanks for all the detail. Looking at the first quarter guidance and appreciate obviously all builders are kind of dealing with that choppiness. But the closings growth of, I believe, the range is 2% to 7% and you talked about October being choppy. Are we to think about order growth in a similar type of mid single-digit range, you know, obviously you don't kind of guide to order growth per se. But given the choppiness in the market, obviously there's been an amount of reduction in sales pace. And I had presumed that it takes a while to get the community count growth up and running. Should I be thinking or should we be thinking that perhaps orders were down a little bit in October, and might be in the low to mid single-digit range for the quarter?
Jessica Hansen -- Vice President, Investor Relations
I think that's fair, Mike, as you said, we don't comment in our guide specifically on sales. But we've said several times on the call about the choppiness we've seen this fall and we are behind our business plan albeit only one month into the year. And as we've said, we continue to see the good demand at affordable price points. So, we are very well positioned to continue to go outsell the industry and whatever the market is out there to continue to consolidate share. With that closing guide is that would tell you that we're behind our plan one month in to the year so far.
Michael Rehaut -- JPMorgan -- Analyst
Okay. I appreciate that. And I guess just following on to that, I mean, last cycle, you guys were pretty aggressive in being kind of a leader in terms of any types of incentive adjustments or price adjustments. And pretty strong in terms of being able to, let's say, get cash flow and turnover your inventory as the market was turning. At this point though, given the nature of where we are seasonally, it sounds like you're still holding off any more aggressive type of wholesale adjustments to price or incentives, obviously still making the smaller adjustments as needed. But is that the right way to think about it in terms of obviously still expecting a 20% to 22% margin for the year. And any more type of aggressive adjustments to the pricing strategy, we probably wouldn't expect to occur this quarter more as the spring comes together?
Michael Murray -- Executive Vice President and Chief Operating Officer
I think you're right, Mike. It's we're one month into our fiscal year, we're in the slowest seasonal period of time, historically, slowest seasonal period of time. And also occurring in that period of time, we saw interest rates move up, that the buyers dealing with -- the buyers dealt with a lot in media coverage that was crazy, and so we're not going to make any, as Jessica said before, any significant business decisions based upon this just this small step into the year, we are so far. But we will continue to monitor in every community, it's the same operating strategy we have, what pace price combination drives the best returns for each one of those communities and the market is going to help us make those decisions. Our fiscal '19 margins in the range we've given, it's largely the spring selling season that's can determine what those margins end up being. So, we are very pleased with the positioning the teams have done in terms of building out their sales and construction and customer care teams, and a lot positions in the homes we have in inventory and it's going to be the execution in the spring against that's going to determine, where fiscal '19 comes out.
David Auld -- President and Chief Executive Officer
We have done a lot more in January that went out today (ph).
Michael Rehaut -- JPMorgan -- Analyst
Great. Thank you.
Bill Wheat -- Executive Vice President and Chief Financial Officer
Thank you, Mike.
Operator
Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Ryan Tomasello -- KBW -- Analyst
Good morning. This is actually Ryan Tomasello on for Jade. Just for the industry overall, I was wondering if you have an internal forecast of where you expect new home sales and housing starts to be in 2019 for the overall market? Do you expect the market to see growth overall next year and obviously this wouldn't be read as a direct correlation to your results, given your internal growth targets?
Jessica Hansen -- Vice President, Investor Relations
We honestly utilized all our bank research coverage for the economists. We don't have an economist on staff that doesn't fit into our SG&A budget very nicely. But we're looking at all the same things and most of the people on the line probably are, and clearly demographics are favorable, the economy seems to be on very good footing. And so really as we see it today, we would believe there to be growth in the industry next year, particularly at affordable price points. So, we'll adjust as we need to, to meet market conditions, but yes, I think we would expect. If builders are putting a right price houses on the ground, there should be growth in the industry as a whole and whatever that growth ultimately is,
we are working to outpace that.
Ryan Tomasello -- KBW -- Analyst
Okay. And then in terms the land market, I was wondering, what you're seeing there in terms of any changes in competition, given the slowdown we're seeing or any changes in pricing? And as a follow-up to that, if you see any risk of increased impairments and then your land purchase earlier this year or last year, as you adjust the product mix to fit the buyer base?
Michael Murray -- Executive Vice President and Chief Operating Officer
We're not seeing much change in sort of the land market conditions over where we have been. And we certainly don't expect any impairments or impairment risk on recent purchases, based upon, where market conditions are today, despite we talk about them being choppy. We are still not any kind of alarmed relative to valuations of our projects.
Ryan Tomasello -- KBW -- Analyst
Okay. Thanks for the color.
Operator
Our next question comes from the line of Jack Micenko with SIG. Please proceed with your question.
Soham Bhonsle -- SIG -- Analyst
Good morning guys. This is actually Soham Bhonsle on for Jack this morning. In your prepared remarks, Mike, I think you touched on the decrease in homes size by 3%. Can you maybe speak to what percentage of the portfolio you're seeing this and is there particular price point that those decreases are coming in?
Michael Murray -- Executive Vice President and Chief Operating Officer
That have exactly driven by brand or price stratification, where those aren't in front of me. Jessica is flipping through -- we don't have it here, we will try to get it back to you.
Soham Bhonsle -- SIG -- Analyst
All right.
Michael Murray -- Executive Vice President and Chief Operating Officer
But in the aggregate, is kind of where that number is, that's can be reflective across the whole thing. But the majority of the lion share of our portfolio is within the D.R. Horton brand and the Express brand. So, that's what's going to be driving any kind of an average -- overall average movement and it has come down a little bit. As we've been starting houses in line with what we believe our buyers payments, tolerances are and then the buyers are making some of those selections to gravitate to those smaller price -- smaller homes.
Jessica Hansen -- Vice President, Investor Relations
The 3% square footage decline with the year-over-year metrics that this is an apples-to-apples to that. But I do have our sequential Q3 versus Q4 by brand in front of me and our square footage across all four brands declined slightly sequentially, which will be right, what we've been saying for a while now as interest rates rise, people who need or want to buy a house just by a little of house.
Michael Murray -- Executive Vice President and Chief Operating Officer
That combined with a little bit more of a mix shift toward more first-time buyers would generally be buying a smaller house as well would be the other component of it.
Soham Bhonsle -- SIG -- Analyst
Right, that makes sense. And then in your cash flow statement, just noticed that you guys are breaking out multifamily expenditures this quarter really for the first time. Is there something to call out there or and then maybe your thoughts on how you're approaching the market going forward?
Bill Wheat -- Executive Vice President and Chief Financial Officer
We have -- I think we've mentioned a couple of different times. We've been in the process really for the last 2 to 2.5 years of starting up internally the capability to build multifamily communities. We have done this on land that our homebuilding operations already owned and so it's a very synergistic business with our homebuilding business. In the past, we've typically sold off parcels that were zoned for multi-family. But we've developed the capabilities to build those in-house. We've made very good progress on that. Currently, we have four projects actively under construction and two projects that are substantially complete, one of which is actually being marketed for sale right now.
So, that we've been building that slowly internally, but it is growing. And we would expect in the coming year for it to grow a bit more and begin to see some sales of assets there as well along the way. So, we felt like just in terms of our presentation in our cash flow as it begins to grow a bit as a small component of our business to call out that cash flow would be a prudent move so that everyone can see -- you have better visibility to that portion of our cash.
Jessica Hansen -- Vice President, Investor Relations
And more accurately be able to calculate free cash flow number, which is I think is what most people do since it's have been so small than previously been in PP&E. So, we wanted to get it out PP&E to keep free cash flow claim.
Soham Bhonsle -- SIG -- Analyst
Is there a sort of a target you guys have internally to get that business to certain point?
Michael Murray -- Executive Vice President and Chief Operating Officer
It's incrementally growing, but again we have six projects going. We've got projects planned to start in the coming year, and we do believe that it's a very synergistic business to our business and there are some natural advantages that we have as with our relationships on the material side, on the land side and the synergies with our homebuilding business to build something that can create value for our shareholders over the long term.
Soham Bhonsle -- SIG -- Analyst
Thank you.
Jessica Hansen -- Vice President, Investor Relations
Thank you.
Operator
Ladies and gentlemen, due to time constraints we have reached the end of our question-and-answer session. And I would like to turn the call back over to David Auld for closing remarks.
David Auld -- President and Chief Executive Officer
Thank you, Devon. We appreciate everyone's time on the call today and look forward to speaking to you again in January to share our first quarter results. And to the entire D.R. Horton team, Don Horton and his Executive Group, thank you for your continued hard work and incredible focus in delivering an outstanding 2018. And for insiders only just want you to know we awarded Mr. Horton his purple shirt last night at dinner. Have a great day and thank you.
Operator
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.
Duration: 62 minutes
Call participants:
Jessica Hansen -- Vice President, Investor Relations
David Auld -- President and Chief Executive Officer
Michael Murray -- Executive Vice President and Chief Operating Officer
Bill Wheat -- Executive Vice President and Chief Financial Officer
Carl Reichardt -- BTIG -- Analyst
Stephen East -- Wells Fargo -- Analyst
John Lovallo -- Bank of America -- Analyst
Stephen Kim -- Evercore ISI -- Analyst
Eric Bosshard -- Cleveland Research Company -- Analyst
Alan Ratner -- Zelman & Associates -- Analyst
Susan Maklari -- Credit Suisse Securities LLC -- Analyst
Michael Rehaut -- JPMorgan -- Analyst
Ryan Tomasello -- KBW -- Analyst
Soham Bhonsle -- SIG -- Analyst
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