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Forestar Group, Inc. (NYSE:FOR)
Q2 2019 Earnings Call
April 25, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the second quarter 2019 earnings conference call for DR Horton, America's builder -- the largest builder in the United States. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *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 DR Horton. Please go ahead, Jessica.

Jessica Hansen -- Vice President of Investor Relations

Thank you, Kevin, and good morning. Welcome to our call to discuss our results for the second quarter of Fiscal 2019. 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 DR Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes may not be materially different. All forward-looking statements are based upon information available to DR Horton on the date of this conference call, and DR 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 DR Horton's annual report on Form 10K, and 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 10Q early next week. After this call, we will post an investor presentation, and supplementary data to our investor relations site, on the "Presentations" section, under "News and Events," for your reference. This supplementary data relates to our humbling 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.

David V Auld -- Chief Executive Officer

Thank you, Jessica -- and good morning. In addition to Jessica, I am pleased to be joined by Mike Murray, our Executive Vice President and Chief Operating Officer, and Bill Wheat, our Executive Vice President and Chief Financial Officer.

The DR Horton team delivered a solid second quarter of 2019. Our consolidated revenues increased 9% to $4.1 billion, pre-tax income was $463 million, and our pre-tax profit margin was 11.2%. The spring selling season is going well, as our net sales holders increased 52% sequentially, and 6% from the prior-year quarter. These results reflect the strength of our operational teams, our ability to leverage DR Horton's scale across our broad geographic footprint, and our product positioning to offer affordable homes across multiple brands.

As we have discussed on our last two calls, affordability concerns have cost some moderation of demand for homes since late 2018, particularly at higher price points. Now, with this spring, we have continued to see good demand, and a limited supply of homes at affordable prices across our markets, while economic fundamentals and financing availability remain solid. We are pleased with our product positioning, and our people sales trends to date. Our strategic focus is to continue consolidating market share while growing our revenues and profits, generating strong annual cash flows and returns, and maintaining a flexible financial position, with a conservative balance sheet that includes an ample supply of homes, lots, and land to support growth. We are well positioned for the remainder of 2019, and future years. Mike?

Michael J Murray -- Chief Operating Officer

Net income is attributable to DR Horton for the second quarter of both Fiscal 2019 and Fiscal 2018 was $351 million. Net income per diluted share in the second quarter of 2019 was $0.93, up from $0.91 last year, due to our lower share count this year. Our consolidated pre-tax income for the quarter was $463 million, and our homebuilding pre-tax income was $400 million. Our second quarter home sales revenues increased 8% to $4 billion on 13,480 homes closed, up from $3.7 billion on 12,281 homes closed in the prior year. Our average closing price for the quarter was $295,300.00, down 1% from the prior year, due to product mix, and the average size of our homes closed was down 3% -- both reflecting our ongoing efforts to keep our homes affordable. Bill?

Bill W Wheat -- Chief Financial Officer

Net sales orders in the second quarter increased 6% to 16,805 homes, and the value of those orders was $4.9 billion, up from $4.7 billion in the prior year. Our average number of active selling communities increased 8% from the prior year, and 4% sequentially. Excluding the builders we acquired earlier this year, our second quarter net sales orders increased 3%, and our average number of active selling communities increased 2% year-over-year, and 1% sequentially.

Our average sales price on net sales orders in the second quarter was $294,100.00, down 2% from the prior year. The cancellation rate for the second quarter was 19%, consistent with the same quarter last year. Jessica?

Jessica Hansen -- Vice President of Investor Relations

Our gross profit margin on home sales revenue in the second quarter was 19.3%, down 150 basis points from the second quarter last year, and down 70 basis points sequentially from the December quarter. The sequential decrease in gross margin was in line with our expectations, and was due to cost increases, less pricing power, and higher incentives. Based on today's market conditions and expected cost moderation, we currently expect our home sales gross margin to be flat, or increase slightly sequentially in the third quarter -- subject to possible fluctuations due to product and geographic mix, as well as the relative impact in warranty, litigation, and purchase accounting. Bill?

Bill W Wheat -- Chief Financial Officer

In the second quarter, homebuilding SG&A expense as a percentage of revenues was 9%, compared to 8.8% in the prior year quarter. The increase in our homebuilding SG&A percentage from the prior year was mainly from higher employee costs, due in part to compensation accruals related to increases in our stock price, and the public equity markets this quarter. Year to date, homebuilding SG&A expense was 9.2% of revenues, compared to 9.1% last year. We remain focused on managing our SG&A efficiently, while ensuring that our infrastructure adequately supports our opportunities to increase market share over the long term. Mike?

Michael J Murray -- Chief Operating Officer

We ended the second quarter with 32,100 homes in inventory, excluding models. 17,800 of our homes were unsold, with 12,500 in various stages of construction, and 5,300 completed. Our current inventory of homes puts us in a solid position to achieve the Fiscal 2019 closings guidance we provided in our press release this morning. We manage our home starts at a community level, and we adjust our starts as necessary to align inventory levels with current sales pace in each community.

Our homebuilding investments in lots, land, and development during the second quarter totaled $740 million, of which $340 million was for land and finished lots, and $400 million was for land development. Our underwriting criteria and operational expectations for new communities remain consistent, at a minimum 20% annual pre-tax return on inventory, and a return of our initial cash investment within 24 months. David?

David V Auld -- Chief Executive Officer

We increased the portion of our land and lot pipeline that we control through land purchase contracts again this quarter. At March 31st, our homebuilding lot position consisted of 316,400 lots, of which 120,900 -- or 38% -- were owned, and 195,500 -- or 62% -- were controlled. 35,000 of our total owned lots are finished, and 103,000 of our controlled lots are, or will be finished when we purchase them. We plan to continue to increase our lot position being developed by third parties by supporting the expansion of Forestar's national lot manufacturing platform, and continuing to expand our relationship with alot developers across the country. Our lot portfolio, with an ample supply of lots for homes at affordable price points is a strong competitive advantage. Jessica?

Jessica Hansen -- Vice President of Investor Relations

Financial services pre-tax income in the second quarter increased 8% to $34 million, from $31.4 million in the prior year. Financial services pre-tax profit margin for the quarter was 33.5%, up from 33.1% in the prior year. 98% of our mortgage company's loan originations are the quarter related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 56% of DR Horton homebuyers. FHA and VA loans accounted for 45% of the mortgage company's volume. Borrowers originating loans with DHA Mortgage this quarter had an average FICO score of 719, and an average loan-to-value ratio of 88%. First-time homebuyers represented 53% of the closings handled by our mortgage company, up from 45% in the prior year, reflecting our continued focus on offering affordable homes for entry-level buyers. Mike?

Michael J Murray -- Chief Operating Officer

Forestar, our majority-owned subsidiary, is a publicly traded residential lot manufacturer, now operating in 41 markets across 17 states. At March 31st, Forestar owned and controlled approximately 31,400 lots, of which 3,600 are finished. 21,700 of Forestar's lots are under contract with DR Horton, or subject to a right of first offer under the Master Supply agreement between our two companies.

Forestar's revenues in the second quarter increased 189%, to %65.4 million over the prior year quarter, and pre-tax income increased 257% to $16.4 million. During the six-month ended March 31st, Forestar delivered 1,066 lots, and is still on track to grow its Fiscal 2019 deliveries to 4,000 lots, generating $300-350 million of revenue, and its Fiscal 2020 deliveries to approximately 10,000 lots, generating $700-800 million of revenue. Forestar is a profitable business today, and we expect Forestar to remain profitable throughout its significant growth period, with expected pre-tax margins of approximately 10% by Fiscal 2021. These expectations are Forestar's stand-alone results.

Forestar is making steady progress in building its operational platform and capital structure to support its significant growth plans. Forestar's liquidity, capital base, and lot position at March 31st are sufficient to support its Fiscal 2019 and 2020 planned growth in lot deliveries and revenues. To support investments for revenue growth in 2021 and beyond, earlier this month Forestar issued $350 million of 8% senior notes due in 2024. Subject to market conditions, Forestar expects to opportunistically access the equity and debt capital markets as necessary to provide additional capital for long-term growth, while managing their balance sheet at a net leverage ratio of 40% or less.

Forestar will post an updated presentation to the "Events and Presentation" section of their investor site at investor.forestar.com at the conclusion of this call. This presentation describes Forestar's unique lot manufacturing business model, and its significant growth and value creation opportunity. We encourage investors to review it. David?

David V Auld -- Chief Executive Officer

DHI Communities is our multi-family rental company, focused on suburban garden-style apartments, and currently operates primarily in Texas, Arizona, and Florida. DHI Communities has four projects under active construction, and two projects that were substantially complete at the end of the quarter. During the quarter, DHI Communities sold its first apartment project of 432 units located in McKinney, Texas for $73.4 million, and recognized a gain on sale of $29.3 million.

DHI Communities' total assets were $170 million at March 31st, and it is reported as a part of "other business" in our second financials. Bill?

Bill W Wheat -- Chief Financial Officer

At March 31st, our $1 billion of home liquidity was comprised of $557 million of unrestricted homebuilding cash, and $447 million of available capacity on our revolving credit facility. Our homebuilding leverage ratio improved 130 basis points from a year ago, to 22.9%. During the quarter, we repaid $500 million of senior notes at their maturity, and the balance of our homebuilding public notes outstanding at the end of the quarter was $1.9 billion. We have $500 million of senior note maturities due in the next 12 months.

During the quarter, we paid cash dividends of $56 million; we also repurchased 2 million shares of common stock for $75.6 million, bringing our total repurchases for the first half of the year to 6.1 million shares, and $216.2 million. Our remaining stock repurchase authorization at quarter-end was $159.3 million.

At March 31st, our stockholders' equity was $9.4 billion, and book value per share was $25.09, up 16% from a year ago. David?

David V Auld -- Chief Executive Officer

Our balanced capital approach focuses on being flexible, opportunistic, and disciplined. Our balance sheet's strength, earnings, and annual 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 continued top cash flow priorities are to consolidate market share by investing in our homebuilding business and strategic acquisitions, reduce homebuilding leverage, and return capital to our shareholders through dividends and share repurchases. Jessica?

Jessica Hansen -- Vice President of Investor Relations

Looking forward, and as outlined in our press release this morning, we are providing our current expectations for the full year of Fiscal 2019, based on today's market conditions and our results from the first half of the year. We currently expect to generate consolidated revenues of between $16.7 and $17 billion, and to close approximately 55,000-56,000 homes. We are forecasting a full-year Fiscal 2019 income tax rate of approximately 24.5%. We continue to expect to generate homebuilding cash flow from operations of at least $1 billion for the full fiscal year, and we expect our outstanding share count to be down slightly at the end of the year, compared to the end of Fiscal 2018.

For the third quarter of Fiscal 2019, we expect to generate consolidated revenues in the range of $4.4-4.6 billion, and to close approximately 14,500-15,000 homes during the quarter. We expect our home sales gross margin in the third quarter to be in the range of 19.3-19.8%, and our homebuilding SG&A in the third quarter to be approximately 8.2-8.3%. David?

David V Auld -- Chief Executive Officer

In closing, our results reflect the strength of our long-tenured, and well-established operating platform across the country. We are striving to be the leading builder in each of our markets, and to expand our industry-leading market share. We are focused on consolidating market share while growing our revenues and profits, generating strong annual cash flows and returns, and maintaining a flexible financial position. We are well positioned to do so, with our conservative balance sheet, broad geographic footprint, affordable product offerings across multiple brands, attractive finished lot and land position, and -- most importantly -- our outstanding experienced team across the country. We thank the entire DR Horton team for their continued focus and hard work; we look forward to working together to continue growing and improving our operations.

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

Questions and Answers:

Operator

Thank you, we'll now open up to a question and answer session. If you'd like to be placed in the question queue, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 to if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. Once again, that is *1 to ask a question at this time. One moment, please, while we poll for questions.

Our first question today is coming from Stephen East from Wells Fargo; your line is now live.

Stephen East -- Wells Fargo -- Managing Director

Thank you, and good morning, everybody. David, maybe I'll start with the progression through the quarter: what you all were seeing with traffic trends with what are progression in probably -- maybe most importantly -- the incentive progression through the quarter, and if you can shed any light on what you're seeing in April with those?

David V Auld -- Chief Executive Officer

Stephen, that play was kind of a traditional seasonality, and it's got a little better in January, a little better in February, a little better in March. The market is, it's stayed pretty solid out there, and April is pretty much as we expected, so I would tell you -- kind of a pleasant surprise, given our first quarter -- so we're happy with what we're seeing out there right now.

Stephen East -- Wells Fargo -- Managing Director

Okay, if you look at the incentives progression, either with what you all were doing, or what you think you were seeing in the market, is that also unwinding as you move through the months?

David V Auld -- Chief Executive Officer

We have seen it unwinding, yes. Incentives are certainly lower today than they were first quarter, and they've progressively -- we've been able to hit our sales targets with a little less incentives each month.

Stephen East -- Wells Fargo -- Managing Director

Okay, all right, fair enough. And then the other thing -- go ahead.

David V Auld -- Chief Executive Officer

I said pretty much as we expected, yeah.

Stephen East -- Wells Fargo -- Managing Director

Okay, and then the other thing -- just looking at your capital allocation, moving forward, your option lots up to 62%. I know you don't like to -- 60% was your target that you stood by, but we're already past that, so -- maybe a compound question here, 1.) If you can talk about how you expect that to progress, and then looking at your capital allocation moving forward, you do have some debt coming due. Your net debt to total cap's probably a little bit, or a whole lot higher than DR wants it, et cetera. How do you look at allocating your capital?

David V Auld -- Chief Executive Officer

I gotta tell you, Stephen, we're kinda maintaining as much flexibility as we possibly can. You know, in Don Horton's world, any debt's bad debt. I can tell you this: from a return base, and capital priorities, some debt's not a terrible thing. Bill?

Bill W Wheat -- Chief Financial Officer

Stephen, back to the option percentage: certainly, we're pleased with the progress we're making. We expect to continue to progress from here, but we're not gonna put out a set target, necessarily, but we do expect to continue to increase the percentage of our lots that are controlled through purchase contracts. And that's giving us more flexibility, and what that sets up is the potential to increase our cash flow from operations over the next few years, and with that increased cash flow, that gives us more flexibility for capital allocation. We've been able to fold in share repurchases into our allocation over the last year-and-a-half or so, and pleased with the progress we've made there, and expect to continue to keep that as an important part of our allocation.

Stephen East -- Wells Fargo -- Managing Director

All right, thanks a lot.

Operator

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

Carl Reichardt -- BTIG -- Managing Director, Homebuilding Analyst

Thanks, morning everybody. I wanted to ask about Texas. So it's been a sort of a quarter of your business -- 25%, I think -- for a bit, and your orders were slightly down/flat-ish there. We've seen some of your peers report better numbers out of Texas; some of them have talked about it being effectively the best market they've got in terms of turnover, so it looks like you lost some share there this quarter, in fiscal and orders. So can you talk a little bit, David, about what's happened in that particular market for you, particularly over the last quarter, given your strength there historically?

David V Auld -- Chief Executive Officer

Carl, I can tell you that Texas is a great market. We're seeing solid performance across all of our divisions. We're coming of a really tough comp second quarter last year, and we are a dominant market share in the four major cities, so we're very happy with Texas. We like what our operators are doing out there, and the truth is, our targeting growth in Texas is probably low single-digit to mid-single-digit for the year, and we think we're well positioned to hit that.

Jessica Hansen -- Vice President of Investor Relations

We've got a lot of markets across the rest of the country, Carl, where we don't have that kind of dominant position, and that's where a lot of our growth's coming from this year while we maintain, or continue to gradually improve our share in Texas.

Carl Reichardt -- BTIG -- Managing Director, Homebuilding Analyst

Right, OK. I appreciate that, Jessica, thank you. And then in terms of community count, you had an increase this quarter. You're starting to grow those again -- can you give a sort of a sense, as you look -- maybe over the next year or so -- how you're thinking about the expansion of outlet count ex acquisitions? Is that something we can expect to accelerate beyond just acquisitions? Thanks.

David V Auld -- Chief Executive Officer

I wouldn't say "accelerate," we have markets where we are not dominant, and our focus is to be in a significant, if not dominant market position in every market, so a lot of growth opportunities. A lag in Texas typically absorbs at a much higher pace than lags in other markets, so it's balanced, it's disciplined, and it's something we're focused on continuing.

Jessica Hansen -- Vice President of Investor Relations

We have a great lot position that will continue to replenish our communities, so we wouldn't -- probably -- anticipate anything more than flat to slightly up, organically, going forward.

Carl Reichardt -- BTIG -- Managing Director, Homebuilding Analyst

Great, thanks, Jessica. Thanks, all.

Operator

Thank you, our next questions is coming from John Movallo [ph.] from Bank of America Merrill Lynch; your line is now live.

John Movallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys, thank you for taking my questions, as well. The first question is: your outlook for a flat sequential gross margin at the low end of the range, at least, would seem to imply a fairly meaningful year-over-year step down in core margin versus what you saw in the first quarter, despite what -- I guess should be a lumber benefit, for one -- and improving market. Can you just help us understand some of the moving pieces there?

Bill W Wheat -- Chief Financial Officer

I think you see, John, that we are expecting some benefit from the lumber softening we saw last year. As those closings come through, and we start to deliver those, we have started to look to continue to deliver those, but the market did take a step backwards in our first quarter, and the pricing incentive levels that we're pushing off of right now are gonna allow us to be a little stronger in the margin, but it's difficult to gauge the full extent of how much and when any of those concessions we gave up in the fall are gonna be back, and showing up in closing margins. Trying to take a measured pace to looking at margin.

John Movallo -- Bank of America Merrill Lynch -- Analyst

Gotcha, and then -- I guess just more broadly speaking, in terms of just the overall environment -- are you guys fairly confident that things are reaccelerating at this point? I mean, would you expect growth to kind of trend higher as the year progresses, here, for DR Horton and for the industry itself?

David V Auld -- Chief Executive Officer

You know, reaccelerating, that's a tough question to answer today. A lot depends on interest rates. I can tell you we're very happy with the spring market so far; we're gonna know a lot more as it rolls along. If it continues through May and early June, it's gonna be a great year.

Bill W Wheat -- Chief Financial Officer

And we would look and see that some of the demand that was displaced in the fall will probably elongate a selling season this year, in the spring and into early summer, as those buyers have returned, and more continue to come into the market, seeing it's still a great time to buy a home.

Jessica Hansen -- Vice President of Investor Relations

Our annual guide for closings infers a 6-8% increase in closings, and a 4-6% increase in our consolidated revenues, so we are in a little less pricing power this year, but we've got a great housing position to go drive outsized growth, as compared to the industry.

John Movallo -- Bank of America Merrill Lynch -- Analyst

Okay, thanks, guys.

Operator

Thank you, our next question is coming from Alan Ratner from Zelman & Associates; your line is now live.

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Hey, guys, good morning. Thanks for taking my questions. Just on that last question -- on the last point, I guess -- I think if you take a step back, 6-8% growth, given how you started the year, is certainly very impressive, especially compared to what we've seen in the market. I know you guys have talked historically about 10-15% -- kinda where you hope to be annually -- so I'm just curious as you kinda think about the way that spring's unfolding, you kinda put some of the softer demand in the rearview mirror. Is that still kinda the hope, and the intention, and kinda the thought, based on what you're seeing right now in the market, that you could eventually get back to that 10-15% annualized growth, or have those plans changed for some reason?

David V Auld -- Chief Executive Officer

It's always possible, Alan. We try to be conservative, disciplined in what we say, and then do what we say we're gonna do, so it depends on the market. As we get through the spring, we'll take a look at it, and then -- how this year ends up -- we'll take a look at next year. I can tell you, our operators all have the Horton DNA in them, and they wanna drive growth, so --

Jessica Hansen -- Vice President of Investor Relations

We're continuing to focus on returns, though -- and so if you look at what we did experience in the late fall and as we were moving into the spring, there's a balance between price and pace, and we're striking that on an individual community level to drive the best possible returns. And in today's market, that may mean that 6-8% growth rate, rather than a 10-15% rate to continue to maintain or improve upon our overall returns.

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Got it, that's helpful, Jessica. And second, you gave some status on the mortgage business and the profitability of this quarter was actually quite impressive, considering the challenges in the mortgage space today. I was hoping you could just comment quickly on what you're seeing regarding the changes out of FHA. I know your average metrics are very favorable, but there's a piece of your business that goes outside of the mortgage business, so has there been any fallout or any impact at all from the adjustments FHA made in March?

Bill W Wheat -- Chief Financial Officer

We have not seen a material impact in the business at all. At the margin, there were certainly individual customers that may have to wait, and work on a different loan program, or are getting delayed in their process, but we have not seen any significant impact whatsoever.

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Got it. One final one, if I could sneak it in -- Jessica, I might have missed it, but was there a pre-tax margin guidance for the full year? I think you typically give that.

Jessica Hansen -- Vice President of Investor Relations

There was not. We just gave a gross margin and SG&A guidance for the third quarter.

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Okay, got it.

Michael J Murray -- Chief Operating Officer

We need to see the rest of the year to really guide beyond Q3 -- or the rest the spring to guide beyond Q3.

Jessica Hansen -- Vice President of Investor Relations

We're continuing to sell and close 30-40% of our homes; it was actually higher than 40% this quarter, and so to get a feel for gross margin much further out than a quarter is pretty difficult.

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Understood, thanks.

Operator

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

Stephen Kim -- Evercore ISI -- Fundamental Research Analyst

Yeah, thanks a lot. Just a follow-on there with Alan's question on the full-year profitability projection. In the past, you've talked a lot about how you tend to run your business with a 20-22% kind of gross margin range. I'm gathering from your commentary that, much like the top-line historical range 10-15% growth, it isn't necessarily the dominating factor in the way you're running your business right now, but rather returns that -- similarly, on the gross margin side, we could see this year be a little bit below your 20-22% historical range, and that wouldn't be inconsistent with how you're positioning yourself for the longer term in a difficult market. I just wanna make sure that I'm hearing you correctly, and then could you -- with respect to margins -- talk about the degree to which mix may be impacting your margin?

In other words, is Express still generating gross margins comparable to the company average, or maybe a little better? Just give us some sense about mix, in terms of your margin make-up range right now.

Bill W Wheat -- Chief Financial Officer

Yeah, in terms of the gross margin: yes, we're balancing pace and price, margin and volume to generate the best returns we have. So yes, those are levers that may move up and down within our range. I would say our longer-term range on margin has been 19-21%, or a little bit broader 18-22%, and so a margin in the 19s is certainly not unusual for us. And in the current market -- coming off the incentive levels that we had to put in place to regain momentum back in Q1, we feel good about the level we're at, and the ability to potentially start to carve some margin back, going forward.

In terms of the gross margin profile across our brands, we're still seeing a pretty tight range, in terms of margin, and still seeing very good margins within our Express brand. That's still the heart of the market, where we're seeing the strongest demand, and the lowest supply of inventory in the marketplace -- so still seeing very solid margins in Express.

Stephen Kim -- Evercore ISI -- Fundamental Research Analyst

Great, that's very helpful. And then, with respect to M&A, I think you talked about maintaining a balanced and disciplined approach. Recently we've seen a couple of what I would basically call "asset purchases" in local markets -- Poldi just announced the American West, and then Lennar, we understand, bought Lovell Homes out in Raleigh -- and so I guess I'm wondering: do you see the competition for local deals -- midsize sort of private names in local markets -- do you see that competition intensifying in the current environment? And if not, or I should say, in a situation where that is actually happening, can you talk about how DR Horton is positioned or prepared to approach those kinds of opportunities?

Do you think that this is something that you would, for instance, at this point favor share repurchases, just because of an intensifying environment for M&A?

Bill W Wheat -- Chief Financial Officer

I would say, Stephen -- see that we look at the M&A as opportunities to add to the long-term profitability, and capabilities of the DR Horton company overall, so where we can expand with great teams into new markets, or deepening share in existing markets with great teams of people, that's our primary focus. And we're frankly very selective on where we're gonna get aggressive in any kind of acquisition opportunity.

Having said that, we continue to look at lots of opportunities, and acquisitions, and -- yeah, we certainly think that DHI is an attractive acquisition opportunity, as well for us, in terms of our share buyback. You can see that, as we have allocated more capital to that this fiscal year than in prior, so yeah, it's the best approach.

Stephen Kim -- Evercore ISI -- Fundamental Research Analyst

So you're kind of drawing a distinction between the way you would approach M&A -- in other words, being -- basically, you're personnel-oriented, and talent oriented, as opposed to what we've seen from -- let's say Poldi and Lennar most recently, in terms of primarily being asset acquisitions, right?

Bill W Wheat -- Chief Financial Officer

Yeah, it certainly is a component of the overall acquisition, but the determining factor for us is generally gonna be the people, and the talent, rather than simply the lot position or the lot portfolio. That is what justifies -- for us -- the effort, the expense, and the potential risk you have with an acquisition is the long-term payback of adding to your platform.

Stephen Kim -- Evercore ISI -- Fundamental Research Analyst

Great. Thanks very much, guys.

Bill W Wheat -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is coming from Michael Rejo from JP Morgan; your line is now live.

Michael Rejo -- JP Morgan -- Analyst

Thanks, good morning, everyone. First question I had was just kind of the pace that you've seen over the last two or three months -- perhaps relative to your expectations. So far, as some of the other builders have reported, they pointed to not just seasonal improvement, but a little bit of improved year-over-year trends -- in other words, the year-over-year growth improving as well from January, to February, into March, not every month, but certainly toward the end of the quarter, and perhaps even into April. So I was curious if you could give us a sense if that year-over-year growth accelerated, as well -- particularly on a sales basis -- and when you talk to -- similarly -- incentives improving sequentially. Obviously, they're still up year-over-year; I was wondering if that year-over-year delta on incentives, perhaps, has moderated as well?

Jessica Hansen -- Vice President of Investor Relations

Mike, we generally don't comment on the individual months within a quarter, in terms of the year-over-year improvement. As David said, we're very pleased with our sales pace; we did see normal seasonality as we moved throughout the quarter from month to month to month, and incentives -- for us -- are always on a community-by-community basis, so we've got communities where we have been able to roll those back fully from what we had to do in the fall, and we've got some that still have some elevated incentives out there, but as we continue to move throughout the spring, we're hopeful that we can continue to dial those back in communities where -- maybe -- we haven't been able to fully yet.

Michael J Murray -- Chief Operating Officer

And I would say we're not seeing anything outside of normal seasonality. It's been a good spring; it's been a solid spring, but we would say it's consistent with what we would expect to see in normal seasonality, thus far.

Michael Rejo -- JP Morgan -- Analyst

Okay, so unless I'm interpreting that differently, it seems like perhaps -- again, on a year-over-year trend basis -- I know you kind of punted on the month-to-month, but it sounds like "normal seasonality" means that -- unless I'm reading the tea leaves of your answer a little too finely -- that perhaps it was more steady, it sounds like, rather than improvement. I guess a second question -- maybe just to zone in on a region here -- I appreciate the color commentary on Texas -- another big focal point has been California, and in particular, some of the real improvement month-to-month over the last two/three months -- the 4Q was pretty rough. I just wanted to get a sense, again, if there's been anything outside of normal seasonality, or would you say that -- by contrast -- anything a little bit more from an acceleration standpoint?

David V Auld -- Chief Executive Officer

I spent the last four to six weeks traveling our California market-driving communities. Very impressed with the effort, execution of our teams out there. I don't think our California market is on fire, by any stretch of the imagination, but I will say -- in my world, effort and execution are what separates us from our competitors, and I was very happy with what I saw from our people.

The overall market in California appears to be getting a little better. It was not good in the first quarter, and there's some portions of it that give you a sense that it is coming back fairly well, but we're focusing as affordable as you can be in California. I was very happy with what I saw, I'll say that.

Jessica Hansen -- Vice President of Investor Relations

And Mike, when we post our supplemental data after the call, you'll see we've been talking a lot about the -- in the West, part of our issue had just been getting the communities online, and this is the first quarter in several quarters our West region community count, on average, is up 5% year-over-year, and it's even up 4% sequentially. So we're getting those new communities online, that we're very excited about the product that we're bringing to market.

Michael J Murray -- Chief Operating Officer

And I think you'll see those new communities contribute more meaningful in Q3 and Q4 to sales than in the first month, or the first quarter of their opening.

Michael Rejo -- JP Morgan -- Analyst

Great, thanks very much. See you in a few weeks.

Michael J Murray -- Chief Operating Officer

Thanks.

Operator

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

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

Good morning, everybody.

Jessica Hansen -- Vice President of Investor Relations

Good morning.

David V Auld -- Chief Executive Officer

Hey, Ken.

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

So could you just start with your spec completed number?

Michael J Murray -- Chief Operating Officer

That's 5,300.

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

Okay, and I apologize; I was just kind of going through calls this morning, but you gave guidance for 14,500-15,000. Was that correct, for 3Q?

Michael J Murray -- Chief Operating Officer

Right, that's correct for Q3.

Jessica Hansen -- Vice President of Investor Relations

Yep.

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

So lemme ask you this question: if you look at your units in inventory, it appears that your conversion rate of closing is decelerating for kind of the past -- which would imply, and that's been happening in recent quarters, so it's one of two things: obviously, there's slower demand, or your inventory on average is just a little bit younger. Is it because your -- why is that? Is it because you're building more specs, so you just tend to have more younger inventory, or something that was more backlog-ish, and what exactly was the inter-quarter order of closings, please?

Michael J Murray -- Chief Operating Officer

Inter-quarter closings would be those we closed in the same quarter. I believe it was over 40%.

Jessica Hansen -- Vice President of Investor Relations

Yes.

Michael J Murray -- Chief Operating Officer

In the second quarter. Looking at the age of our inventory, the number of unfilled homes that we have in inventory completed over six months was the same at March 31, '19 as it was at March 31, '18. So the inventory is still young, to use your word, and looking at that, we did have some -- I don't wanna use the "W" word -- but we did have some events this quarter that affected some production. So we do have some of those completions coming a little bit later out of the winter and into the early spring.

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

Yeah, and how -- lemme look at this another way. Obviously, you guys are issuing guidance because the next six months are pretty much already going vertical. How do you think about your spec position, as it relates to backlogs? So obviously, you wanna achieve ease of flow, which you do by not reducing your December quarter units in inventory as much as you did historically -- and others do -- which helps you with market share, but how do you think about how you're running spec, versus what you're seeing in terms of orders?

I mean, are you always gonna keep -- basically, are you gonna continue construction at a 2:1 ratio to backlog? Is that your approach, in general, or how should we think about how that spec'll turn, relative to the lower industry growth rate that we're seeing?

Michael J Murray -- Chief Operating Officer

Generally, we look at a snapshot of inventory position of around 50% of sold to unsold homes, in total inventory. That will vary higher and lower at different points in the year, and that's sort of the sum result of every one of our operating divisions evaluating their communities one by one, looking at a trailing sales pace, along with an expected forward sales pace, based upon where they are in the year and what they're seeing in those sub-markets, and then they're adjusting their spec inventory kind of relative to the construction cycle of that community, and managing it week-to-week-to-week, based on sales, closings, and construction completions, and their varying starts on that basis. The sum result of it comes up to about a 50% ratio -- plus/minus throughout the year.

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

Thank you.

Michael J Murray -- Chief Operating Officer

So your 2:1, yeah, is a good ratio.

Operator

Thank you. Our next question is coming from Matthew Bouley from Barclays; your call is now live.

Matthew Bouley -- Barclays -- Equity Research Analyst

Hi, thank you for taking my questions. I want to ask about the closings guidance. I think 3-6% in the third quarter; it seems that the full year guide suggests some acceleration of that growth in the fourth quarter so is that third quarter guide -- the 3-6% -- is that a fair reflection for how you're seeing the sales environment today? Obviously, as you just mentioned, 40% orders and closings in the same quarter -- and then what kind of gives you confidence in that acceleration in the fourth quarter? Is it really just the timing of your spec completions, or -- I guess what else can you say there? Thank you.

Bill W Wheat -- Chief Financial Officer

I think, yes. We attest for our spec completions, as well as a bit of an elongated demand cycle this spring, because of what got displaced in the market in the fall. That's still the same people that wanna live in a home from the fall -- still wanna live in a home; they still have a housing need, and we're positioned to supply that need this summer.

Matthew Bouley -- Barclays -- Equity Research Analyst

Okay, thank you for that. And then, just on the purchase accounting, do you have the numbers for what that was in the second quarter, and then how that will trend into the third and fourth quarters?

Jessica Hansen -- Vice President of Investor Relations

Sure, so Matthew, we saw actually 20 basis points of impact in our March quarter. Honestly, probably a little bit lighter than we would've expected; we did -- not that we like to talk about weather -- but some of our acquisitions are in markets that do experience a little bit more extreme weather than a lot of the markets we already operated in, so a little bit of that purchase accounting impact has been delayed, really until this quarter -- Q3 and into Q4. So I wouldn't be surprised if that 20 basis points of impact in March ticks up in June.

Matthew Bouley -- Barclays -- Equity Research Analyst

Okay, that's helpful. Thanks again.

Operator

Thank you. Our next question is coming from Nishu Sood from Deutsche Bank; your line is now live.

Nishu Sood -- Deutsche Bank -- Equity Research Analyst

Thank you. I just wanted to ask about the DHI Communities; I appreciate the incremental details on that. Now that that part of your business seems to be maturing, I'm just wondering if you can give us some kind of broad brushstrokes on how you expect that to grow. How big a part of the business it can become, what regions of the country you might ultimately expect it to be in, and whether it would kind of stick to the garden-style apartments, or whether it might broaden in terms of product lines? Just wanted to kind of get whatever longer-term visions you can provide right now.

David V Auld -- Chief Executive Officer

We are, I think, very happy with our progress to date -- building out a team, identifying sites. The whole key for us is sustainable and scalable, so it's gonna tie very closely in with our homebuilding operations. The sites that we're building on right now are pieces of property that were a part of our larger communities, where we're building houses. It seems very synergistic to what we're trying to accomplish; it allows us to reach affordability. Future homeowners, that gives them a -- we start the relationship with them, so we're very excited about it. I think right now, we have four projects under construction, two pretty much completed, and we're in lease-up, and a pipeline of deals across the country of more than 20, so over time, it's gonna be a pretty significant business for us.

Nishu Sood -- Deutsche Bank -- Equity Research Analyst

Got it, thanks.

Michael J Murray -- Chief Operating Officer

We've got [crosstalk] from some very early stage projects, to more robust further down the line. We still expect the next couple of years -- we're not gonna see a sale every quarter, but there will be occasional sales as we deliver the first set of projects that have been in the pipeline the last couple of years, but then -- over the longer term -- certainly, expect some growth there.

Nishu Sood -- Deutsche Bank -- Equity Research Analyst

Got it, got it, thanks. So coming back to the annual guidance, I know there's been a lot of questions about it, and it's been a very difficult environment over the past six to nine months to even think about what '19 might have looked like. Investors generally -- looking at the market -- rates have fallen; the outlook for the year, obviously, from what builders have been saying, has improved, and so I just wanted to dig into how are you reflecting that in your guidance that you're giving? If you look at the volume guidance, for example, acquisitions are a big part of it, and the gross margins -- you're expecting some modest improvement, so -- and of course we appreciate your more kind of level approach to giving guidance through these periods of volatility, but how should we think about how your guidance is reflecting the improvement in demand that the market has seen in recent months?

Should we think about there potentially being more upside against your guidance, or that it's a de-risk, the guidance -- or how should we think about that?

Jessica Hansen -- Vice President of Investor Relations

I would tell you, the first thing I would take away is we feel good enough to give guidance again. So that -- to me -- is the biggest takeaway, is that the spring has been good enough we felt comfortable to sit here today, and provide that level of guidance. We'll continue to update as we can, but with six months left in the year, the houses we have under construction, the spring sales we've seen to date -- you know us -- we don't wanna put guidance out there we don't feel comfortable that we can hit, but I'd tell you that we think that 55,000-56,000 annual homes is a very realistic range of what we would expect to deliver for this year.

Nishu Sood -- Deutsche Bank -- Equity Research Analyst

Got it, thank you.

Operator

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

Buck Horne -- Raymond James -- Vice President, Equity Research, Housing & Real Estate

Hey, thanks. Good morning, I just wanna follow up on Nishu's comment, or his question about the DHI Communities, and just wondering -- I guess -- are you considering a build-to-hold strategy, or are these all gonna be built for sale at some point? And also: would you consider JV partners, or some other capital structure to scale that up quickly?

Michael J Murray -- Chief Operating Officer

Currently, we're in a kind of build-for-sale operation. We would evaluate alternative capital structures; David mentioned before we're looking for something that's scalable and sustainable, and that would certainly be more accretive to returns in that business. First thing for us was simplistically wanting to figure out and understand the business, and looking at how we can build that business as sort of a combination with our homebuilding platform across the country. So a lot of the initial pipeline that we've been working with in current projects have largely been on land parcels that are part of the larger master plans we've been developing, and building homes in, and rather than -- in the past -- typically selling off those corners of land to other developers, look to develop the capabilities to monetize that land, and add that value ourselves.

So as we look to roll that out forward, and accelerate it, we would certainly be looking at the capitalization of that business with a lot of options open in front of us.

Buck Horne -- Raymond James -- Vice President, Equity Research, Housing & Real Estate

Okay, that's great. That's helpful, and on the debt that you have coming due in the next 12 months, I think you mentioned another $500 million -- is there a plan to possibly pay that off sooner, or would you wait till the maturity on that? And also, just related to Forestar's capital plans, how are you thinking about the market timing for their debt or equity?

Michael J Murray -- Chief Operating Officer

In terms of the Horton capital plan: no plans to pay off the next maturity early. We'll then be evaluating our cash flow, our investment plans for Fiscal 2020, and as we put those plans together, we'll determine whether we simply pay that debt off, or whether we refinance all or a portion of that.

In terms of Forestar capital: very pleased with the progress that has been made with respect to building the capital stack at Forestar -- them issuing their first issuance of senior notes here in April was an important step to getting the capital start, making investments for Fiscal '21 revenues for Forestar. Certainly, equity is in the plans, as well, and we wanna be prepared and in position for Forestar to issue equity when the opportunity presents itself. We've been very, very pleased that Forestar now has three equity analysts covering them, and the management team at Forestar -- really, alongside the team at Horton here, as well -- is starting to hold more meetings with investors. We'll begin attending some investor conferences, and basically getting the story out there. I would encourage investors to look at the investor deck that's on the Forestar website; it's very helpful in describing the lot manufacturing business model at Forestar, and certainly look forward to them being able to expand their float in the future.

Jessica Hansen -- Vice President of Investor Relations

And Forestar will start having a stand-alone conference call, beginning in the June quarter.

Buck Horne -- Raymond James -- Vice President, Equity Research, Housing & Real Estate

Thank you.

Operator

Thank you; our next question is coming from Jack Micenko from SIG. Your line is now live.

Song Bosely -- SIG -- Senior Equity Research Analyst

Hey, good morning, guys. This is actually Song Bosely on for Jack this morning. Just on your gross margin guide for third quarter, I know you guys are on the lower end; it's 19.3%, which is flat, but how do we sort of get to the higher end of 19.8? Can you just maybe talk through some of the moving parts of how we could get there?

Bill W Wheat -- Chief Financial Officer

Sure, we do have some cost tailwinds that we do expect to start coming through our closings in Q3, primarily from lumber pricing having dropped in the latter part of '18, and -- as we've talked about a bit -- as we've been able to pull back our incentives gradually through the spring, that should result in some improved margins, versus the closings we've seen in Q2. I'd say those are our primary factors that we would expect to see some sequential or potential for margin improvement.

Song Bosely -- SIG -- Senior Equity Research Analyst

Okay, great. And then on sales pace, looks like core sales pace was -- ex the acquisitions -- was up 1%, but down 2% if you were to include the acquisitions. Can you just confirm that, and then -- in going forward, should we expect order increases to be more a function of pace improvement at this point, or more of a community count, year-over-year?

Jessica Hansen -- Vice President of Investor Relations

So on your first question, our absorption -- kind of on the same store basis -- is up 1% year-over-year, and it was up 49% sequentially, so that's kind of right in line with traditional seasonality, even ex-acquisitions. And then the second question, sorry?

Song Bosely -- SIG -- Senior Equity Research Analyst

Just in terms of how should we think about order improvement year-over-year -- is it pace-driven, community count?

Jessica Hansen -- Vice President of Investor Relations

Well, our community count did pick up organically this quarter, and then even further because of the acquisition, so I'd anticipate the community count remaining up through the remainder of the year. We'll see what comes from absorption versus communities, but we haven't given a specific guide to sales.

Song Bosely -- SIG -- Senior Equity Research Analyst

Okay, thank you.

Operator

Thank you. Our next question is coming from Susan McCarty from Credit Suisse; your line is now live.

Susan McCarty -- Credit Suisse -- Admin Assistant

Thank you, good morning.

Multiple Speakers

Good morning.

Susan McCarty -- Credit Suisse -- Admin Assistant

My first question is just: can you talk a little bit to what you've seen across your various brands? You've got such a range in there, with Freedom, Express, Emerald. Can you just talk to maybe some of the differences that you've seen, and especially if things have improved as we've moved through the quarter?

David V Auld -- Chief Executive Officer

You know, we're very happy with the performance of all the brands. I mean, we are growing Freedom, I think that's gonna be a very important part of our future offerings, and Emerald has stayed fairly steady at about 3% of our deliveries. The Horton brand maintains dominance and Express is pretty much fully rolled out, so I think that 30-35% may go up a little bit. Percent of deliveries will remain constant.

Susan McCarty -- Credit Suisse -- Admin Assistant

Okay, and can you just talk to any updated expectations as it relates to input cost? You've talked in the past about lumber coming off, and how that could provide some offset within the gross margins to some of the pressures that are there. Has anything changed in there, or anything that we should sort of be thinking about in the back half?

Jessica Hansen -- Vice President of Investor Relations

No, Sue. I mean, we do expect that cost moderation to primarily come from lumber. As it pertains to other material inputs, we've always got some costs that are rising, but we generally find ways to offset those, so we would expect lumber to be a tailwind to gross margin in the back half of the year. Labor costs haven't come down, even with some of the softness, but in terms of trade availability, that's helped a little bit, as some builders have slowed their starts this spring, as compared to maybe what was anticipated.

I don't think we've given our revenue and stick-and-brick square foot yet, that we typically provide on the call, so on a year-over-year basis our revenues per square foot were up about 2%, versus our stick-and-brick costs, which were up 4%, so that goes right in line with the year-over-year decline in gross margin we saw. Sequentially, that was a much tighter range. Our revenue per square foot was essentially flat, and our stick-and-brick cost per square foot was just very, very slightly up.

Susan McCarty -- Credit Suisse -- Admin Assistant

Okay, thank you for the color.

Operator

Thank you. Our final question today is coming from Alex Barron from Housing Research Center; your line is now live.

Alex Barron -- Housing Research Center -- Senior Research Analyst

Thanks, guys. I wanted to ask along the lines of the multi-family rental business whether you guys have given any thought, or started any plans to build up single-family rental communities for sale.

Michael J Murray -- Chief Operating Officer

We're always looking at opportunities, Alex, and as we get further into that -- if we get further into that -- we will certainly let you know.

Alex Barron -- Housing Research Center -- Senior Research Analyst

Okay.

David V Auld -- Chief Executive Officer

If the question is have we given it any thought -- absolutely. We have [audio breaks up ] pretty much everything going on in the industry.

Alex Barron -- Housing Research Center -- Senior Research Analyst

One last one, if I can ask: on the other one, the multi-family -- I don't know if I missed it, or did you guys give any specific guidance? Can we expect another of those communities to report another gain next quarter, or not necessarily?

Bill W Wheat -- Chief Financial Officer

No, we've not given specific guidance, Alex. We're still in the early stages; this was the first project sale in the multi-family division. We do have four projects under construction, and two projects that are substantially completed in the lease-up phase, so we sort of would expect we would have two projects in the coming quarters, but we don't expect to see a sale every quarter. We're not in position yet to provide more specific guidance than that.

Alex Barron -- Housing Research Center -- Senior Research Analyst

Got it, thanks so much. Thank you.

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 or closing comments.

David V Auld -- Chief Executive Officer

Thank you, Kevin. We appreciate everyone's time on the call today, and look forward to speaking to you again in July to share the third quarter results. And to the DR Horton team -- incredibly proud of what you guys have accomplished out there over the last six months. I just wanna 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 participation today.

Duration: 61 minutes

Call participants:

Jessica Hansen -- Vice President of Investor Relations

David V Auld -- Chief Executive Officer

Michael J Murray -- Chief Operating Officer

Bill W Wheat -- Chief Financial Officer

Stephen East -- Wells Fargo -- Managing Director

Carl Reichardt -- BTIG -- Managing Director, Homebuilding Analyst

John Movallo -- Bank of America Merrill Lynch -- Analyst

Alan Ratner -- Zelman & Associates -- Managing Director, Equity Research

Stephen Kim -- Evercore ISI -- Fundamental Research Analyst

Michael Rejo -- JP Morgan -- Analyst

Kenneth Zener -- KeyBanc Capital Markets -- Managing Director

Matthew Bouley -- Barclays -- Equity Research Analyst

Nishu Sood -- Deutsche Bank -- Equity Research Analyst

Buck Horne -- Raymond James -- Vice President, Equity Research, Housing & Real Estate

Song Bosely -- SIG -- Senior Equity Research Analyst

Susan McCarty -- Credit Suisse -- Admin Assistant

Alex Barron -- Housing Research Center -- Senior Research Analyst

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