Q1 2022 Pultegroup Inc Earnings Call
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Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will be placed again on music hold thank you for your patience.
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Well sure.
Good morning, My name is Abby and I'll be your conference operator today at this time I would like to welcome everyone to the Pulte Group incorporated Q1, 2022 earnings conference call.
Today's conference is being recorded.
And all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time.
Simply press the Star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one once again.
Thank you and Jim humor, you May begin your conference great. Thank you Abby good morning, and thanks, everyone for participating in today's call to discuss Pulte groups first quarter earnings for the period ended May 31 2022.
Q1 represents another quarter of strong financial results and has gotten the year off to a great start for US I'm joined on today's call by Ryan Marshall Marshall, President and CEO Bob.
Pablo Shaughnessy Executive Vice President and CFO , Jim SaaS Senior VP finance.
A copy of our earnings release, and this morning's presentation slides.
And posted to our corporate website at Pulte Pulte group Dot com.
We'll also post an audio replay of this call later today.
Please note that as part of this mornings call. We will review our prior to their prior year results as reported and as adjusted to exclude the impact of a $61 million pre tax charge associated with the bond tender and a $10 million pretax insurance benefit recorded in the period.
A reconciliation of prior year adjusted results and reported financial results is included in this morning's release and within today's webcast slides.
I encourage you to review these tables to assist in your analysis of our business performance.
I also want to alert everyone that today's presentation includes forward looking statements about the company's expected future performance.
Results could differ materially from those suggested in prior comments made today.
The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly.
Quarterly reports now let me turn the call over to Ryan Marshall Ryan. Thanks.
Thanks, Jim and good morning, as Bob will detail shortly Pulte group delivered outstanding first quarter financial results with year over year growth of 18% in wholesale revenues and 43% and adjusted earnings per share.
The significant increase in our Q1 earnings per share reflects gains in a number of areas, including higher selling prices expanded gross margins increased overhead leverage and our active share repurchase program.
Holton group's first quarter financial results are just the most recent in a string of strong quarters that have raised our return on equity to 29, 4% for the trailing 12 months.
There is a lot for investors to be excited about in terms of the company's operating and financial performance.
Taking a step back from the specifics of our Q1 financial results I think it's fair to say that the supply demand dynamics of the first quarter were consistent with the trends the industry has been experiencing for the past year or more.
In short demand was strong available inventory was scarce and the incoming supply is limited.
Let me take a minute to expand on these thoughts.
On the demand side consumer interest in purchasing a new home remained high throughout the quarter.
With few exceptions demand was strong across all the price points buyer groups and markets that we serve.
The U S housing market continues to benefit from favorable demographics, a strong economy, and an outstanding job market and a rising wage environment.
Home sales are also benefiting from ongoing and significant increases in rental rates for single and multifamily dwellings.
According to John Burns real estate consulting their numbers indicate that rental prices for single family homes increased by upwards of 5% in 2021, while multifamily lease rates were up by approximately 13% over the prior year.
Forecast point to further increases in 2022.
Even with today's higher prices and rising rates owning a home can still make clear economic sense for many consumers.
Not only can homebuyers get a comparable or even lower monthly payment, but that payment is more stable over time.
Given this demand strength in the first quarter, we were able to raise prices and effectively all of our communities was sequential price increases in the range of 1% to 5% common across the country.
In addition to the fundamental strength in homebuyer demand home price appreciation is benefiting from a lack of available inventory in both new and resale <unk>.
Similar to buying a new car. These days people, who are actively shopping for a home understand how competitive the market is.
This brings me to the supply side of the equation as demonstrated by our first quarter results. Our teams did an outstanding job advancing our homes through the construction process and even surpassed the high end of our closing guidance I want to recognize the efforts of our homebuilding operations to manage through the constraints in the availability of people.
<unk> and materials that are impacting everything from land entitlement and development to home construction.
Depending on the specific market the availability of labor and materials has at best remain the same but in certain areas conditions have gotten a little worse and build cycles have gotten longer.
Given these challenging conditions, our production timelines extended by about one week in the first quarter and now stand at 145 to 150 days and most of our divisions.
With only a couple of days remaining in April and less dynamics changed dramatically in the next couple of weeks, which does not look likely any improvement in the supply chain would provide a more meaningful benefit to 2023 production.
Bob's comments will include us reaffirming our guide for expected 2022 deliveries of 31000 homes.
I'd highlight that this guidance assumes that the availability of labor and materials does not change for better or worse.
With our production cycles remaining extended we continue to tightly control sales in most of our communities across the country.
We appreciate these restrictions can be frustrating for consumers, but it is the right strategic decisions given overall conditions from.
From both the customer experience and a business risk perspective, it doesn't make sense to extend our backlog out a year or more just to record another sign up.
Even with all of these challenges I want to highlight that we started almost 9000 homes in the first quarter and that we now have approximately 5200 spec homes in production.
The majority of these homes are in the initial start in framing stages that we would expect these houses to deliver in the back half of 2022.
As we've noted on prior calls our spec production is largely focused in our entry level communities.
I think it's fair to say that housing demand remains strong home prices continue to rise and the supply of new construction homes coming to market is constrained that being said the federal reserve has been very clear in signaling that interest rates are going higher as they seek to control inflation that has hit 40 year highs.
There are a lot of favorable market dynamics that can support ongoing buyer demand in the face of higher rates, but the fed is intent on slowing down the economy and that certainly has the potential to impact the housing industry.
Given this dynamic it makes sense for us to take actions to position our business for continued success for now this means focusing on our land acquisition practices internally, we are committed to increasing our option lot position and have set a goal of having 65% to 70% of our future land pipeline control.
Under option.
Our disciplined land investment process helped us to place some great land positions under control over the past several years and will be closing on that will be closing on in 2022.
Going forward, we will continue our thoughtful approach to investing in the business and we'll be prepared to make adjustments in response to changing market conditions.
We certainly expect that our land teams can continue to identify tremendous land opportunities, but we want to make sure that only the best projects ultimately get approved.
Now, let me turn the call to Bob for additional comments on our first quarter Bob.
Thanks, Ryan and good morning, as Ryan highlighted the year has gotten off to an excellent start as wholesale revenues in the first quarter were up 18% over last year to $3 1 billion.
Higher revenues for the quarter were driven by an 18% increase in average sales price to $508000. While closings at 6039 homes were consistent with last year.
Higher asps for the period was driven by double digit gains in pricing within our first time move up and active adult buyer groups.
By buyer group, our mix of closings for the quarter for the first quarter was also consistent with last year as we remain we remain well balanced across the primary buyer groups.
In the quarter of 35% of buyers were first time, 40% were move up and 25% were active adult in.
In the comparable prior year period, the breakdown was 33% first time, 44% move up and 23% active adult.
In the first quarter, we recorded net new orders of 7971 homes, which is down 19% from last year.
Lower orders for the quarter were primarily the result of a 7% decrease in community count combined with the impact of aggressively controlling sales paces given ongoing disruptions in the supply chain.
As has been the case for the past several quarters, we continue to restrict sales in many communities in order to align sales with current production basis.
Looking more closely at our order activity orders to first time buyers decreased 13% to 2000 and 710 homes.
While orders to move up buyers were lower by 22% to 3341 homes and active adult orders declined 23% to 1920 homes.
Relative outperformance among first time buyers is due to the availability of the stack production. We started in the back half of 2021 that supported some incremental orders.
Between delays and municipal approvals and extended land development timelines.
Taking longer for some communities to open for sale.
As a result in addition to being down from the prior year, our first quarter average community count of 7777% was slightly below our previous guidance.
We expect a modest drag in community openings that we experienced in the first quarter to continue for the remainder of the year as.
As such we now expect that our average community count in the second quarter will be 780 <unk> with.
With growth to 800 in the third quarter and 830 in the fourth quarter.
Reflective of the strength strong demand conditions, we experienced in the quarter, our cancellation rate remains exceptionally low at 9%.
In total we ended the first quarter with a unit backlog of 19935 homes, which is an increase of 5% over last year.
The dollar value of our backlog increased 31% to $11 5 billion, which reflects a 5% unit growth combined with the significant year over year increase in our ASP and backlog.
As Ryan noted our teams are doing a great job moving homes through the production cycle in light of the challenges the industry is facing and the availability of labor and materials.
As a result, we ended the first quarter with 21269 homes under construction, which is an increase of 44% over last year.
This production number includes 5181 spec homes that are currently in the pipeline, which is almost triple our spec units at this time last year.
At quarter end specs or 24% of units under production as we continue to make steady progress toward our goal of 25, 30%.
Our overall production pipeline is still early in the construction process is 28% of these homes are at the initial start stage with 43% of the homes at the framing stage.
We ended the quarter with only 64 finished specs, which is consistent with our comments that homes made available for sale sell quickly.
Based on the University of homes in production as well as their stage of construction. We currently expect to deliver between 7000 207600 homes in the second quarter.
Again, assuming no significant improvement or erosion in the availability of labor and materials, we still expect to deliver 31000 homes for the year, which would be an increase of 7% over last year.
On our prior earnings call, we noted that given supply constraints and limited opportunity to meaningfully increase construction pace.
We would rely on price as the bigger lever to maximize return.
Looking at the dollar value of our backlog and new orders. If you can see that this is what has occurred.
Based on the average price in backlog and the mix of homes, we expect to deliver.
We expect our second quarter closings to have an ASP in the range of $525 to $535000.
Inclusive of the $508000 average sales price realized in Q1, and the first time spec homes, we expect to deliver in the back half of the year. We now expect our average sales price for the full year to also be in the range of 525 to $535000.
As we always highlight the final mix of deliveries can influence the average sales price we realized in any given quarter.
Given the ongoing strong demand conditions, we have been able to increase sales prices sufficiently to offset rising costs and to further expand our gross margin in.
In the first quarter homebuilding gross margin was 29%, which is an increase of 350 basis points over the first quarter of last year and is up 220 basis points sequentially.
In addition to the strong demand and pricing environment. Our Q1 deliveries also benefited from the flow through of lower cost lumber as prices for wood products rolled over in the back half of last year.
Until the recent pullback lumber prices had moved significantly higher since the beginning of the year, which will impact our closings in the back half of this year.
Beyond lumber, we are continuing to see meaningful inflation in most materials and labor costs.
As such even with the recent pullback in lumber, we expect house cost inflation exclusive of land costs via the range of 10% to 12% for the full year.
Based on the strength of recent selling conditions and despite the volatility in the materials and labor market. We now expect our gross margin to be in the range of 29, 5% to 30% for each of the remaining three quarters of the year.
Given the timing and impact of lumber and other input costs, we expect to be towards the higher end of this range in Q2, but likely towards the lower end of that range in the third and fourth quarters.
As always there are a lot of moving pieces. So we'll update you on our gross margin guidance if needed as we move through the year.
Our SG&A expense in the first quarter was $329 million or 10, 7% of home sale revenues, which is in line with our earlier guidance.
In the comparable prior year period, our reported SG&A expense of $272 million or 10, 5% of home sale revenues.
A pretax insurance benefit 10 million <unk>.
Exclusive of that benefit our adjusted SG&A expense was $282 million or 10, 9% of home sale revenues.
Given expected homebuilding revenues for the coming quarters. We currently expect SG&A expense in the second quarter to be in the range of nine 4% to nine 6%.
Which would be a 30 basis point improvement over the prior year at the midpoint.
For the full year, we now expect SG&A expense to be in the range of nine 2% to nine 5% of home sale revenues.
First quarter pre tax income for our financial services operations was $41 million compared with prior year pre tax income of $66 million.
Lower pre tax income for the current period is reflective of a much more competitive market conditions, which negatively.
Our reported tax expense for the first quarter was $145 million for an effective tax rate of 24, 2%.
Our effective tax rate in the period was lower than our recent guidance, we recorded benefits related to equity compensation in the quarter.
Looking ahead.
We estimate our tax rate to be approximately 25% in each quarter over the balance of the year.
Our reported net income for the first quarter was $454 million or $1 83 per share.
In the comparable prior year period, our reported net income was $304 million or $1 13 per share while adjusted net income was $343 million or $1 28 per share.
In the first quarter the company repurchased 10 3 million common shares for approximately 4% of the shares outstanding at the end of 2021 at an average price of $48 59.
Relative to the first quarter of last year, our share count is down by almost 10%.
In addition to allocating $500 million to share repurchases in the first quarter, we invested $1 1 billion in land acquisition and development.
This keeps us on track to achieve our prior guidance of $4 5 billion to $5 billion of land spend for the full year with more than 50% of that spend being for development of existing land assets.
Inclusive of our.
Our first quarter spend we ended the quarter with approximately 235000 lots under control of which 52% were hold held under option or.
Our strong land pipeline provides us with velocity to grow our business, while allowing us to focus future investment in projects that meet our underwriting standards.
Even after allocating approximately $1 $6 billion to investment in the business and share repurchases.
We ended the quarter with $1 $2 billion of cash and a gross debt to capital ratio of 21, 5%.
It's worth mentioning here that is highlighted in this morning's earnings release Moodys Investor Service recently noted.
The strength of our operations and overall financial position when they upgraded Pulte group senior unsecured ratings from <unk> to <unk> two from <unk> III.
As Ryan discussed given referred to reserve comments that we're in for a period of rising rates. We are acutely focused on ways to mitigate land related risks.
In recent years, we have established a land pipeline that can support the ongoing growth of our operations, but provides optionality should demand conditions change in the future.
Going forward, we will continue to emphasize the use of lot options are comparable structures to control rather than holding positions and we are actively working to increase our percentage of option lots within our land portfolio.
Now, let me turn the call back to Ryan.
Thanks, Bob.
We realized continued strong buyer demand in the first quarter and buyer interest has remained high through April that being said, a 200 basis point increase in mortgage rates since the start of the year is likely to have an impact on consumers, even though with the potential for changes in demand I think the limited supply of available homes means prices can remain high in <unk>.
The construction industry in an advantageous position to weather future demand volatility as.
As we sit here today, the bigger challenge by far isn't getting the houses sold but rather getting them built that said it is important that we take actions now to put Pulte group in the best possible position for continued success.
Based on recent field visits and walking numerous job sites I can personally tell you that our teams are doing an amazing job getting our homes constructed I want to thank our entire organization for their efforts, but I have to highlight the work of our corporate and field based procurement teams and sourcing even the most basic materials can change from week to week, but.
This group has learned to adapt and find creative solutions to the most challenging situations.
Before opening the call to questions I would also like to highlight that Pulte group was again ranked among the 100 best companies to work for by Great place to work in Fortune magazine we.
We didn't just rank again this year, but jumped up 32 positions to number 43 on the list.
<unk> ranked is certainly a nice acknowledgement, but much more important is actually having an amazing and supportive culture that makes faulty group a place where people want to be.
This is an important competitive advantage when working to attract and retain the most talented individuals'.
Now, let me turn the call back to Jim Great. Thanks, Brian We're now prepared to open the call for questions. So we can get to as many questions as possible. During the remaining time of this call. We ask that you limit yourself to one question and one follow up thank.
Thank you Abbie if you'll explain the process we will get started.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and again, we ask that you. Please limit yourself to one question and one follow up question, we'll pause for a moment to compile the Q&A roster.
And we will take our first question from Matthew Bouley with Barclays.
Hi, This is Ashley on for Matt today, Thanks for all the color.
So just my first question understanding that you could call order strength across the business, but I was wondering if there is any reason to think that.
Specifically the data.
Entry level buyers may begin to see greater challenges, given where rates are going.
Well actually I think it's a fair question as we highlighted in our prepared remarks, the demand that we saw in the first quarter was exceptionally strong and Thats continued into April .
To your point.
If there is a buyer group that will be more impacted by rising rates. It certainly the first time buyer.
For it's for that reason among others that we've maintained the importance of our diversified and balanced consumer strategy.
We have about 35% of our business that specifically targeted to entry level.
We do tend to play at the higher price points within within the entry level consumer group. So I think it gives us some some room to move around.
The other piece that we've done here to help with the kind of buying process as most of those homes were starting to specs and we're not releasing them for sale until they are closer to the delivery window, which I think shortens the amount of time that a buyer we will be waiting to take delivery of their home in our bag.
Log.
Thanks for that.
And then have you done any recent staff costs on your backlog to kind of see what the potential risks of your buyers kind of fit to the backlog burn for a while as they lock in rate.
We have actually Bob will give you a little color on that.
Yes, I think we're always obviously in close contact with our backlog.
We have seen people.
Taking a longer rate locked position.
And so yeah, we've highlighted that an increase in rates.
Single digit of 100 basis point rate increase is a single digit.
Perhaps in pact or our backlog, yes, it's interesting most of the folks that are there have significant equity built up in their house and so they've expressed that they want to close.
And so we have lots of different ways that we can help people get there whether it's to source additional income if they have some additional down payment different programs. So.
The backlog.
Is pretty solid.
And obviously people have changes in their circumstances, we work with them as best we can to try and get them to the closing table.
Thanks for that and good luck on the quarter.
We will take our next question from Alan Ratner with Zelman and associates.
Hey, guys. Good morning, Thanks for taking my questions and nice quarter.
So I guess a lot that we could drill on it maybe first just to kind of talk a little bit about the land portfolio.
Obviously, you guys are making an effort there to push the option share higher.
If I look at your lot count today about 235000 lots.
That's up about 50 60000 from the end of 2020, and I guess, you've delivered probably 30 to 35000 lots over that timeframe, our homes over that timeframe as well so.
Is the right way to think about it that agnostic to the option and one split that roughly 90 to 100000. So maybe 40% of your portfolio has been kind of contracted are tied up for over the last five.
2018 months or I know, there's a lot of moving pieces. There. So I'm trying to figure out maybe if you can provide some color on the vintage of your portfolio of land and how much actually has been tied up of late.
Hey, Alan.
It's.
I think a way to think about it as pre and post pandemic just to be simple and we would tell you that half of it is pre and half of its post.
Obviously, we put things under control.
Oftentimes a fair amount of time in advance of when we actually take the lots down.
So owned versus option plays into that.
On balance, it's usually taken US 12 to 24 months to get from contract to getting communities open.
So I.
Don't know if that gets you there, but roughly 50% is <unk>.
Pre pandemic three two years ago.
Got it Okay. That's helpful and that was I guess pretty close to the numbers I was getting to there. So I guess when you think about the land market today and that the move towards off balance sheet and what's going on in the industry in general have you seen any.
Let up over the last few months and the competitiveness of the land market whats the inflation rate running at.
Beyond across your portfolio right now.
And what's the outlook going forward I mean, do you think that some of these deals might get retreated.
If things do soften a little bit or is there just so much embedded kind of margin profit in them right now that kind of what's spoken for is likely going to move forward.
Yeah I'll answer Ryan.
I would tell you the land market remains competitive.
Certainly we have other new homebuilders that are that are vying for the prime parcels and theres other other options as well.
Might it be.
Apartments or other types of uses for the land. So I think if you got if you got a well located parcel of land. Its competitive always has been I think always likely will be.
In terms of.
Kind of what we've seen with more recent optionality.
We've we've pushed from two years ago or three years ago, where we were kind of in the thirties, 30% range in terms of amount of options to today, we sit at 52%.
And as you've heard we're going to push that.
Higher we've kind of set a goal and a target for ourselves to be in the 65% to 70% range.
In terms of your question about is there.
Potential for things to be re traded.
For the things that we're purchasing this year Alan I would tell you there's likely no need for that to your point, there's a lot of embedded value.
These are parcels that were put under contract or under control 18 to 24 months ago.
And so they're great deals and we're going to close on them.
We're going to be really thoughtful and judicious around what we're underwriting.
We're putting under control now that will be closings in 'twenty three 'twenty four.
Those are the parcels that.
I think are more susceptible to being tighter in terms of economics that meet our standards.
As part of the reason that we think it's so important that you've got optionality in your land portfolio because it gives us gives you the flexibility.
To maneuver.
That's great I appreciate the color there and if I could sneak in one just housekeeping question do you have the the share of your orders this quarter that would be considered kind of non primary buyers to thinking single family rental investors Slash second homeowners I'm not sure. If you track that but any disclosure you can give there and the trend would be great.
Yes, it's pretty consistent with history at about 3% to 5%.
Great Alright, and that includes the <unk> business that you've <unk>.
<unk> involved with we don't have much of that at this point those closings are coming next year.
Okay perfect. Thanks, guys I appreciate it.
We will take our next question from Mike Dahl with RBC capital markets.
Good morning, Thanks for taking my questions Ryan Thanks for the balanced commentary.
I wanted to I wanted to press on the strategy of restricting sales a little bit because I think we're all synthetic to the supply chain initiatives and obviously in our recent quarters has been very clear that thats.
Right.
The right thing to do but this is a pretty dynamic and rapidly evolving market.
Especially with rates you seem to be acknowledging.
Being a little bit more guarded around what may or may not happen with demand.
At least in the near term and so why why is it still the strategy to be so restrictive on sales versus say you get the buyer has signed up to get them into backlog and then be able to work with them on extended rate locks or things like that to give a little bit more certainty and visibility.
Yes, Mike It's a great question I think the biggest reason is inflation.
We are in hyper inflationary environment right now for all things in the world.
And as we had it was we mentioned in some of our prepared remarks to go out and put another buyer in backlog, that's not going to be able to close on their home for another year.
I don't think its a great experience for anybody the consumer doesn't want to wait that long.
They are susceptible to all kinds of <unk>.
Potential fluctuations in interest rates, which they may or may not be able to handle and then.
We've locked in our economics in terms of what we're charging the consumer at the point that we sign the contract and then we are exposed to a year plus of potential moves in commodity inflation and we just don't think that makes sense for our customer and their experience and it certainly doesn't make sense for our economics.
<unk>.
We really like the way the production environment is moving.
We started almost 9000 homes in the quarter, which I think demonstrates that we're getting units in the ground.
We were able to <unk>.
Close homes that were at the high end of our guide, which I think also demonstrates the fact that.
We're we've got pretty good control and predictability around.
It's in production and so we're we're actively moving through bringing our backlog down to a level, where we can start to release more things for sale.
And we're certainly looking forward to that.
Got it and just as a follow up to that last one as you as you make that progress and then how do you envision the year playing out in terms of the restrictions on your ability to.
To lift those and then ask.
Kind of a follow on to the first one but if I can add a second different question just anything you're seeing around.
Upgrade its options things that might be more leading edge in terms of highlighting certain new buyer sensitivities.
Yes, Mike we don't think as Youre aware, we don't guide to new orders. So we'll stop short of doing that on this call.
We are seeing some minor wins in the supply chain and we're having pretty good luck getting getting homes in the ground.
The first quarter is still a quarter, where you deal with a fair amount of weather. So to get 9000, new starts I think demonstrates the supply or that our production pipeline is moving.
So I think it's fair to fair to assume if we can continue at that rate that youll start to see some restrictions lifted on.
The way, we are releasing lots and re leasing homes for potential sale over the balance of the year, we are reaffirming.
Our guide or we did reaffirm our guide of 31000 closings for the year.
And that assumes that the kind of supply supply chain environment kind of stays about like it is right now.
Yeah, and tiered to your question on the option and lot premiums spend was.
Almost $100 a unit in the most in this print.
That's up 23%, which I think reflects the strength of the market.
And you can we don't provide that level of detail on our full on the orders we've taken but you can see from the average sales prices being up.
We're not seeing much change on that at all.
Okay, Alright, thanks, Brian Thanks, Bob.
We will take our next question from Mike Rehaut with Jpmorgan.
Yes.
Thanks, Good morning, everyone. Thanks for taking my question.
First I just wanted to and I apologize if I missed this earlier.
But.
I wanted to dial in a little bit in terms of intra quarter trends and I know, sometimes the resin reticent to get into month to month, but.
As you've seen obviously a tremendous move in rates during the quarter I was curious if you witnessed any change in terms of either cancelation rates month to month.
Or any.
Yeah.
<unk> in the marketplace, let's say not just you, but with regards to incentives or discounts or even rate of price increases that have occurred.
Hey, Mike. Good morning. This is Ryan good question and the sales pace throughout the quarter was incredibly consistent because we were controlling it.
So we set a rate that we were willing to sell at and so you saw a very.
Similar performance January to February February to March.
Ordinarily you would actually I think in a.
Given the given it's the spring selling season, you would see sales orders build through the quarter and we just didn't let that happen this year.
Discounts are nonexistent, we were less than 1%.
In the quarter, which is down from where it was in the same quarter last year and price increases.
<unk> remained on a on a fairly consistent predictable cadence was what we've been seeing over the past six to nine months. So I think the short answer is.
The market is still healthy demand is still strong there are more buyers out there than we're able to build homes for right now.
Great great. Thanks for that.
Secondly, just.
On the planned increase to our lot optioning.
I was wondering whether or not that's going to be driven by predominantly just by simply an increase in option lots.
Going forward and perhaps keeping the owned lots.
Flat.
You did see your own lots go up.
It looks like about I want to say roughly 15% or so over the last few quarters.
Wondering if that might reverse even.
And with a significantly higher level of lot optioning.
The cash flow generation or reduced cash requirements of running a business like that.
That might change your approach to share repurchase or other uses of capital.
Yes, Mike.
I wouldn't want to speculate on actual owned lots at any one point in time I think we're trying to grow the business to do that you have to have lots on the ground you have to develop them.
Some of it will depend on whether we are buying raw that we're self developing or if we have arrangements that provide us finished lots. So theres a lot of things that will influence that.
In terms of.
What that does ultimately.
Two our capital allocation I think you've seen us as we've driven that option percentage higher.
Been generating a significant amount of cash and we've been using that cash to continue to invest in the business.
And to buy back stock you saw that we.
Obviously bought back a lot of stock this quarter.
Sure our lens on that doesn't change right. So if we have excess capital and if that is being generated by a more efficient balance sheet.
We'll evaluate the needs for that capital and one of those is going to be share repurchases.
So I think at the end of the day.
It does a couple of things for US one it provides us some flexibility and protection from market risk.
It.
Yields higher returns and it yields higher.
Free cash that we would use again consistently with the work we've done over the past.
10 years.
Great. Thanks, so much guys I appreciate it.
Thanks, Mike.
We will take our next question from Rafe.
<unk> from Bank of America.
Hey, good morning, Thanks for taking my question.
Firstly I just wanted to ask to.
Compared to prior periods of rising mortgage rates.
How quickly would you have seen an impact and then how does that compare to how homebuyers have responded with this most recent spike in rates.
Well I think it's I think it's difficult to compare.
Periods of rising rates because the factors that are driving those rising rates are so different.
And we happen to be in an inflationary environment.
With an economy that is continuing to run pretty hot.
We're seeing real wage growth we're seeing.
Low unemployment environment.
And there's a real shortage of supply so.
<unk>.
Sure.
The other the other thing that I think is worth highlighting in this rate environment as the impact of the pandemic.
So I think trying to compare it to rising rate environments.
Well I'm sure you could do it I think the conclusion, you'll draw will likely not be terribly informative.
Okay.
Okay.
It makes sense and then can you just give a little more color on the sort of initiatives to shift more towards lot options.
You have sort of a timeline for the shift to the 65% to 70% and then can you just talk about that.
Willingness and ability to work with land developers and bankers to shift more towards option contracts.
Yes.
So it will it will take some time.
It will be over probably the next.
Two plus years that youll see us progressively move there but.
History is a guide I think when we've laid targets like this out for our operating team and frankly, we've shared it with the investment community we've executed against it and we certainly think that we'll do that here as well.
<unk>, which is the reason that gives us that we've got the confidence to kind of put that target out there.
We think it's very doable.
There are a number of ways in which will fluctuate moving from where we sit today too.
Higher level of Optionality some of that will be done with.
Directly with the land seller, we think thats arguably the best way to do it.
Sometimes we will work with development partners that are actually putting finished lots on the ground for us.
And there are some other alternative arrangements that you can use to get optionality in the land book as well. So I think you should expect us to probably use a mix of all of those things as we move to more optionality.
We think it's Scott.
It's got a lot of benefits in terms of managing risk, but certainly very capital efficient. It helps to drive returns to a better place and we'll use that incremental cash flow.
For some of the things that Bob highlighted a minute ago, including share repurchases.
Okay, great. Thank you.
Okay.
We will take our next question from Truman Patterson with Wolfe Research.
Hey, good morning, everyone. Just wanted to follow up on that prior question with you all.
Targeting more option land over the next couple of years I am just hoping.
If you look at it today, maybe versus six months ago.
Regarding land bankers or landowners developers that youre optioning from have you seen any change in in terms of the deals you know deposits interest costs et cetera.
Or even any sort of change in their appetite.
Continue doing deals.
Yeah, Truman I don't not really right I mean, the market I think is pretty efficient.
We have not seen a reduction in desire. So we're talking to folks there is money.
Available. The question for US has always been can we make the economics makes sense and you've seen things tighten a little bit which is good.
For US again, the goal is to try and.
Create a transaction that yields us.
An acceptable return.
And gives us some flexibility and I don't think that the market has changed appreciably.
We're trying to broaden relationships, we're talking to different folks.
We still probably start at if its a land seller trying to work out a deal with them first.
What we're really doing now is saying, okay, if theyre not willing to do some sort of option.
Does it make sense to put a third party between us and the dirt before we close.
More to come on that to Ryan's point, it'll take some time.
But we are working through it.
Okay. Thanks for that and then.
Bob I believe earlier, you mentioned that there has been some.
The increase in buyer interest and extended rate locks.
Hoping to understand have you all proactively gone.
To the buyers in your backlog and encourage them to lock are you introducing.
Great lot programs and in a similar light.
Are you all increasing.
Either deposit escrow requirements.
Given the current market strength.
The face of rising rates.
Yes to the latter one we always seek a fair deposit and we're continuing to do that today.
In terms of working with our consumers.
We still enjoy a very robust capture rate.
We do offer we think attractive rate lock programs, we have seen people go out a little bit longer they are locking a little bit earlier, and we're encouraging them to do that because the rate environment is going to move it seems it has moved against them. So yes, we've seen in particular, the sort of the 60 day rate lock.
<unk>.
Which is when people are getting closing dates typically.
We've seen a lot of people participating in that.
Okay got you, but not too much longer than 60 days.
Yes that goes to the individual candidly we offer it we've got long, we've got long rate locks, but it gets expensive treatment. So there okay trade for the consumer.
Alright, Thank you and good luck.
Coming year.
Thanks Sherman.
We will take our next question from John Lovallo with UBS.
Good morning, guys. Thank you for taking my questions. The first one.
It sounds like with your community count expectations over the next few quarters and engineered current spec production that we could see a nice reacceleration in orders in the back half. So I'm just curious your thoughts on that and then along the same lines the outlook doesn't seem to include.
Or incorporate any improvement in labor or materials, but if we take a step back just curious what your view is on that I mean, how do you assess the probability that we could see some improvement in those areas in the back half and if we could see some.
As you ramp up production.
Yes, John good morning.
For the question on the community count side.
We're dragging a little bit from where we would optimally have liked to have been and thats, mostly around entitlement delays with municipalities.
It's always been hard and it's taken a long time to get through the entitlement process I would tell ya cities in cities.
City Council and planning and zoning boards.
While I think most are are back and working us is simply taking longer so.
Really nothing there.
That I would I would highlight other than it's taken us a few months longer than ideal.
In terms of kind of the supply environment. We are operating under the assumption that things were going to continue to remain hard for the balance of 2022.
Which means.
We're.
That's why we've reaffirmed the guide that we gave I'll take you back to the commentary that we gave at.
At the end of Q4, our assumption was the 2022 is going to remain a very difficult supply chain here and we're still there.
As I highlighted in my prepared remarks, Jon if we are to see some improvement and I would like our optimistically I think we've.
We've got to start turning the corner soon that's mostly going to benefit our 2023 production.
We're clearly not there yet in terms of kind of giving guidance and then finally in terms of kind of new orders in <unk>.
More communities in less sales restrictions I think that all.
Can be interpreted as a positive for the future but.
We don't we don't give forward guidance in terms of orders so.
While we are optimistic we will report the news when we get there.
Okay. That's helpful. Ryan and then just lastly on the sequential price increases of 1% to 5% can you just remind us how does that compare to the last couple of quarters.
It's very similar.
Not a lot of change.
It was it was a strong quarter in.
Pretty similar to what we saw in Q3 and Q4 of last year.
Great. Thank you guys.
We will take our next question from Stephen Kim with Evercore ISI.
Yes, Thanks, a lot guys.
Observation is that investors are just really struggling to understand how in the face of such higher rates. The demand is still holding up and Ryan I thought you did a good job of clarifying that its really just that the supply is so constrained at the demand can come down, but it'll still be greater demand and supply. So just to push on that a little bit more.
To clarify.
When you talk about rate locks.
Which is something that we've been hearing builders talk a lot more about in recent days I just wanted to confirm that the.
The orders that you're taking in that you've taken lets say over the last months.
Forgetting about the closing, but the orders.
Those buyers are cloud, but today's buyers are qualifying at today's rate and if they are locking they are locking basically at todays rate. So there's nothing about the orders today that reflects an obsolete rate environment I just wanted to have you confirm that for us.
Steve and Thats exactly right buyers that are purchasing today or purchased in the first first quarter.
We qualified them at the right when they.
When they applied for a mortgage.
It's part of the reason that Bob touched on.
The comment that we made about stress testing our backlog those buyers would have qualified at whatever rate was there in a prior period and.
Largely those buyers are still able to qualify and for the ones that are maybe a little tighter we've got programs and things that we can do.
To help get them over the hump.
But to your question Stephen and I think the most important thing is yes. The buyers that are signing up today, they are qualifying and in today's rate environment.
And the reason that they are locking or doing longer rate locks, because they're making the trade between the cost of that forward longer term rate lock against the volatility that they think might.
Play out in the interest rate environment.
Yeah, no I totally get that and I think thats super important because we've been getting some people who.
Some conversations where I think people have gotten a little confused about that so thanks for clarifying the.
The second question relates also on the rate situation.
Incentives so.
One of the things that I've been wondering about is that as you've seen the rates move up and you'd seen cycle times extended in many cases, you might have a situation over the next let's say.
Couple of quarters, where you have buyers who.
The rate lock expired or they didn't rate lock.
And that the home is closing later than it ordinarily would have exposing them to a higher rate when they close and so I'm wondering does your it sounds like today, our rate locks and things like that are being borne by the buyer, but when it comes to the closing table does your gross margin guidance assume that there may be some increase in sort of last minute.
<unk> incentives like maybe at rate buy down or something due to this sort of unusual circumstance.
Or is that and is that something you envision I'm just trying to get a sense for how that might be factor might be an issue as we go forward and to what degree it's been contemplated in your gross margin guidance.
Yes, Stephen Theyre, certainly kind of one off scenarios, where we have to work through some kind of a challenging situation with the consumer.
Pride ourselves on outstanding customer experience and doing the right thing for the consumer which.
By and large I think we do always.
The buyers that are in backlog I've got tremendous backlog are tremendous equity built up based on when they purchased theyre excited to close.
And so theres not really a need for a lot of negotiation at the closing table.
They want to be in their homes, they've got tremendous value built up.
Theyre closing so.
The rates are the.
The gross margin guide that we've given incorporates all of the information that we have.
And kind of what we'd expect to play out over the coming quarters and the balance of the year.
It's a healthy gross margin as I think you can probably appreciate it.
Oh, yeah, absolutely well great. Thanks for all the help I just one observation your comment when you said about half year land is pre pandemic.
Just making sure that that's half of your controlled land, which means that basically all of your owned lots of effective equivalent of all of your owned lots.
Our pre pandemic.
Because about you had about half of year lots controlled which are also owns right actually a little less than half right.
Yes, Stephen that's fair.
Okay. Thank you guys.
We will take our next question from Deepa Raghavan with Wells Fargo Securities.
Hi, Good morning, everyone. Thanks for taking my question.
So there's a lot of talk on supply chain constraints getting better in fact, the week elongated, but even with all of this your closings came in above your high end of guide.
Curious was there anything that particularly drove the beat like did you find additional resources quicker than expected maybe you had better workarounds are let's just.
Maybe things like omicron or whether we're just not as bad as you anticipated when you originally guided.
Well look.
We're slightly on the high end.
I'm sorry, the high end of our guide, which we're thrilled with I think it's more a testament to the strength of our operations team. Our construction team that really worked incredibly hard to deliver homes in a tough environment and it is hard out there.
I think we've.
Done a better job based on being in this environment now for a year probably.
Going on almost two years.
We've probably got better forecasting methodologies and assuming how and how quickly things are going to move through the cycle, but.
Continues to be tough out there, but thats.
That's not taking anything away from our construction team that I think really knocked it out of the park.
No.
That's fair so yes. It was good execution no doubt, but I was just curious if the guide was set a little conservatively to begin with.
Anyways.
Follow up is on again supply chain issues, but more categories base.
Is there any of your CAD.
Categories.
Blake.
At two levels versus first time buyer experiencing any top floor.
Light chain issues versus the other just given that some products, maybe perhaps unique to some categories or is it similar level.
Constrained.
And also.
Should we if and when we go into a market slowdown near term can you talk to which of these categories. Do you think you can take the most share.
Thank you.
And your first question on are there particular supplies no I think it's consistent across buyer groups and it's it's kind of the same.
The same commodities the same items that continue to see constrained.
Things that involve microchips.
Are hard to come by.
There are some commodities some lumber components that are difficult for sure so but in terms of differences between buyer groups.
I wouldn't highlight anything.
As for.
Kind of are there consumer segments, where we can take share I would tell you we're looking to grow our company.
Across the board our mix of business today is exactly where we want it positions.
So as we look to grow the company, we will look to do it.
Equally across all consumer segments.
I would highlight that our del Webb brand remains.
The most recognized and powerful brand within the active adult consumer group.
And so we like what we're able to do there. Similarly, we like the gains that we've made in the entry level.
Consumer space with our Centex product.
Which <unk>.
Products, mostly being sold or started as a spec home and sold just prior to the home being finished.
Thanks, very much good luck guys.
And we will take our next question from Carl Reichardt with BPH.
Thanks, Good morning, guys deep actually asked one of my questions I just have one I wanted to ask how traffic trended during the quarter and into April and then how much does it matter, it's interest less listener heavy relative to what you can produce and youre using best and final offer pricing more frequently and more internet marketing.
Is traffic still the leading indicator of sales that we've all used to think it has been I'm just interested in your perspective on that and Thats all I got thanks guys.
Yes, Carl I think to your point traffic is not as good indicator of the strength of the market is maybe what it used to be.
Most of our communities don't have available inventory that you can buy off the off the lot so to speak.
So.
Some of the things that we're we're really paying attention to today is the traffic to our website virtual visits.
In addition to the customers that are actually come into the stores or the model. The model parks physically. So it's important trust me, we pay attention to it it's something that I'll.
Watch on a weekly basis, what's going on with our traffic, but it is a little bit different.
Right now.
Compared to how it used to be the difference maybe between now and pre pandemic as the virtual traffic.
Which is ridiculously strong compared to maybe prior cycle.
And that was walk in over the over the course of the quarter Ryan and into April .
Uh huh.
Have those numbers.
Does that work in Carl you were asking.
Well I can just just just what we consider old school traffic, let's say.
Yes, it's interesting because of everything Ryan just said that is.
Relative to pre pandemic.
Good, but declining a little bit and mostly because I think people know there's no inventory to look at so.
So theyre not coming into the stores often but they are there.
They are still searching for homes and literally and figuratively.
Many places have such limited lot releases that.
There is not anything to go look at.
Okay. Thank you I appreciate it thanks Ryan.
And ladies and gentlemen, this concludes our question and answer session for today, Mr. Zimmer I will turn the call back over to you. Okay. Appreciate it. Thank you Ravi I appreciate everybody's time today, we're certainly available for questions as we go through the remainder of today and we will look forward to speaking with you on our next call. Thank you.
This.
Today's conference call you may now disconnect.
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