Q3 2023 PulteGroup Inc Earnings Call
Speaker 1: Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today.
Ladies and gentlemen, good morning, My name is Robbie and I will be your conference operator today.
At this time I would like to welcome everyone to the poultry group incorporated third quarter 2023 earnings Conference call.
Speaker 1: At this time, I would like to welcome everyone to the Pulte Group Incorporated third quarter 2023 earnings conference call.
Speaker 1: Today's conference is being recorded and aligns have been placed on mute to prevent any background noise.
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 that time simply press. The star key followed by the number one on your telephone keypad.
Speaker 1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone CPAP.
If you would like to withdraw your question Press Star one a second time.
Speaker 1: If you would like to withdraw your question, press star one a second time.
Speaker 2: Thank you, and I will now turn the conference over to Mr. Jim Zumer, Vice President of Investor Relations. Mr. Zumer, you may begin. Great, thank you Abby. We appreciate everyone joining today's call to discuss Polter Group's third quarter operating and financial results.
Thank you and I will now turn the conference over to Mr. Jim Zuma, Vice President of Investor Relations. If Youre humor, you may begin.
Great. Thank you Andy we appreciate everyone joining today's call.
Third quarter operating and financial results.
As detailed in this morning's earnings release Pulte group delivered another quarter of strong earnings.
Continue to capitalize on our competitive strengths and balanced approach.
Joining me on today's call to discuss our Q3 results are Ryan Marshall President and CEO .
Speaker 2: Joining me on today is called to discuss our Q3 results for Ryan Marshall, President CEO , Volshonis the Executive Vice President, CFO , and Jim Olsaski, Senior Vice President.
Sean as she executive Vice President and CFO did you must ask you senior Vice President Finance.
Copy of our earnings release, and this morning's presentation slides posted to our corporate website.
Post an audio replay of this call later today.
Speaker 2: I want to inform everyone that today's discussion includes board-led statements about the company's expected future.
And inform everyone that today's discussion includes forward looking statements about the company's expected future performance.
Actual results could differ materially from those suggested by our comments.
The most significant risk factors that could affect future results are summarized as part of today's earnings release.
In the accompanying presentation slides these risk factors and other key information are detailed.
Including our annual and quarterly reports.
Let me turn the call over to Brian right.
Thanks, Jim and good morning.
Speaker 3: we will discuss over the next several minutes. Hold the group report in another quarter of outstanding and for a number of key metrics, record financial results.
As we will discuss over the next several minutes Pulte group reported another quarter of outstanding and for a number of key metrics record financial results.
Speaker 3: Our financial performance demonstrates once again the importance of full-py groups balanced and differentiated operating models.
Our financial performance demonstrates once again, the importance of Pulte group's balanced and differentiated operating model.
Speaker 3: leveraging our broad geographic footprint and diversified product offering, we are working to maintain significant market share among all major buyer groups. At the same time, we are successfully executing both large-scale spec and built-in order home building businesses. Our spec business allows us to more cost-efficiently serve first-time buyers.
Leveraging our broad geographic footprint diversified product offering we are working to maintain significant market share among all major buyer groups at the same time, we are successfully executing both large scales back.
Build to order homebuilding businesses.
Respect business allows us to more cost efficiently serve first time buyers well, our built to order business caters to move up and active adult buyers looking to personalize their home location and design features.
Speaker 3: while our build and order business caters to move up, and active adult buyers looking to personalize their home location and design features.
Speaker 3: specific to our financial results, I am extremely proud of our entire organization for their efforts in delivering third quarter results that include a 43% increase in orders, industry leading gross margins of 29.5%.
Specific to our financial results I am extremely proud of our entire organization for their efforts in delivering third quarter results that include a 43% increase in orders.
Industry, leading gross margins of 29, 5%.
Speaker 3: record third quarter earnings of $2.90 per share and a return on equity that exceeded.
Record third quarter earnings of $2 90 per share.
And our return on equity that exceeded 30%.
Yeah.
Speaker 3: In the quarter, I would highlight our active adult business as an important contributor to our sign-up growth.
In the quarter I would highlight our active adult business is an important contributor to our sign up growth.
Speaker 3: and our gross margin performance. In an operating environment where rising mortgage rates are creating, increasing affordability challenges, 47% of our DelWidth purchasers were cash buyers.
And our gross margin performance.
And an operating environment, where rising mortgage rates are creating increasing affordability challenges, 47% of our Delaware purchasers cash buyers.
Speaker 3: This is up from 33% just two years ago.
This is up from 33% just two years ago.
Along with largely being cash buyers. These are customers, who can afford the premium what's in upgrades that make active adult our highest margin business.
Speaker 3: Along with largely being cash buyers, these are customers who can afford the premium lots and upgrades that make active adult our highest margin business.
Speaker 3: Just to demonstrate the brand power of the Dell Web Name. In June , we opened Dell Web Kensington Ridge in Michigan.
Just to demonstrate the brand power of the del Web game in June we opened del Webb Kensington Rich in Michigan.
Speaker 3: Not a market you might consider a hotspot for retiree.
The auto market you might consider a hotspot for retirees.
Speaker 3: In a community where base home prices range from $370,000 to North of $600,000, we have already sold 114 houses in just over 100 days.
In a community where base home prices range from $370000 to north of $600000. We have already sold 114 houses and just over 100 days.
Speaker 3: We fully appreciate that to some degree, all buyers are impacted by rising rates and macroeconomic concerns. But buyer groups can absolutely behave differently over the course of a housing cycle.
We fully appreciate that to some degree all buyers are impacted by rising rates and macroeconomic concerns a buyer groups can absolutely behave differently over the course of a housing cycle.
Speaker 3: For PULTY group, we believe being diversified across all buyer groups can enhance both growth and stability.
For Pulte group, we believe being diversified across all buyer groups can enhance both growth and stability.
Speaker 3: Beyond our diversification across buyer groups, both the group's strong third quarter financial performance also benefited from our ability to offer.
Beyond our diversification across buyer groups, both the group's strong third quarter financial performance also benefited from our ability to offer.
Speaker 3: consumers both spec built and built the order homes. As we've discussed on prior calls over the past 24 months, we have transitioned our first time buyer communities to a spec build model to better serve these customers.
Consumers, both spec built and built to order homes as.
As we've discussed on prior calls over the past 24 months, we have transitioned our first time buyer communities to a spec build model to better serve these customers.
Speaker 3: Located at our first-time business, the fact building allows us to maintain a more consistent cadence of start in those communities, which drives construction efficiencies and is important in working with our trades. More directly to our quarter, having additional inventory available was important, given 49% of our sales in the period for the back sale.
Looking at our first time business spec building allows us to maintain a more consistent cadence of starts in those communities, which drives construction efficiencies and as important and working with our trades.
Or directly to our quarter, having additional inventory available was important given 49% of our sales in the period were spec sales I.
Speaker 3: I would note that 49% specksales in the quarter is down from 58% in Q1 of this year.
I would note that 49% spec sales in the quarter is down from 58% in Q1 of this year.
Speaker 3: I think the decrease in the relative percentage of spec sales in the quarter reflects two interesting dynamics. On one hand, the affordability challenges caused by higher interest rates are pushing some buyers, particularly first-time buyers to the sidelines for now.
I think the decrease and the relative percentage of spec sales in the quarter reflects two interesting dynamics on one hand, the affordability challenges caused by higher interest rates are pushing some buyers, particularly first time buyers to the sidelines for now on.
Speaker 3: On the other hand, more affluent buyers who are less fearful about rates are comfortable contracting for a home where they've selected a lot, the floor plan, and the design options.
On the other hand, more affluent buyers who are less fearful about rates are comfortable contracting for a home where they have selected a lot the floor plan and the design options on.
Speaker 3: on the construction side, I'm pleased to say that we continue to shorten our production cycle.
On the construction side I'm pleased to say that we continue to shorten our production cycle.
Speaker 3: Just to remind people pre-COVID, our production cycle was approximately 90 work days. At its worst, this number ballooned to 170 days. By the end of the quarter, we had reduced this number to about 140 days.
Just to remind people pre.
Pre COVID-19 our production cycle was approximately 90 workdays at its worst this number ballooned to 170 days by the end of the quarter. We had reduced this number to about 140 days.
Speaker 3: Our teams continue to shave days and weeks off our build cycle and we remain optimistic about our ability to get back below 100 days in 2024.
Our teams continue to shave days and weeks off our build cycle and we remain optimistic about our ability to get back below 100 days in 2024.
Speaker 3: As you would expect, cutting more than a month off of our cycle time has positively impacted our cash flow, which we continue to allocate across our key business priorities. Through the first nine months of 2023, we have invested $3 billion in our business through new investments in many Vol zwei systems currently in our future portfolio.
As you would expect cutting more than a month off of our cycle time has positively impacted our cash flow, which we continue to allocate across our key business priorities.
Through the first nine months of 2023, we have invested $3 billion in our business through land acquisition and development.
Speaker 3: Over the same period, we have returned over $800 million to shareholders through Sherry purchases and dividend.
Over this same period, we have returned over $800 billion to shareholders through share repurchases and dividends.
Speaker 3: In this most recent quarter, we even took advantage of market conditions to retire $65 million near-term debt at prices just below par.
And this most recent quarter, we even took advantage of market conditions to retire $65 million near term debt prices just below par.
Speaker 3: Wolfie Group has delivered outstanding operating and financial performance in the quarter and throughout the first nine months of the year as we have leveraged our strong competitive position to capitalize on buyer demand.
The group has delivered outstanding operating and financial performance in the quarter and throughout the first nine months of the year as we have leveraged our strong competitive position to capitalize on buyer demand.
Speaker 3: It grows increasingly clear that federal reserve actions to raise interest rates are having the desired effect of slowing the economy, although the speed of deceleration has been slower than expected, given the unprecedented ramp and rate.
It grows increasingly clear that federal reserve actions to raise interest rates are having the desired effect of slowing the economy, although the speed of deceleration has been slower than expected given the unprecedented ramp in rates.
Speaker 3: Well, arguably not the most supportive economic backdrop, new home demand in 2023 has benefited from a robust jobs market and rising wages. Financially resilient consumers and a continuing dearth of supply from the existing home market. And finally, the fire rates begin to bite. We responded with adjustments in product, pricing, and incentive programs that successfully address consumers biggest pain point affordability.
Well arguably not the most supportive economic backdrop, new home demand in 2023 and has benefited from a robust jobs market and rising wages financially resilient consumers and a continuing dearth of supply from the existing home market.
Finally, as higher rates begin to bite, we responded with adjustments in product pricing and incentive programs successfully address consumer's biggest pain point affordability.
Speaker 3: difficult to know if the Fed has done hiking rates for this economic cycle and trying to guess when they will move to cut rates of challenging. So we will remain disciplined in how we manage our business. We'll focus on serving our customers, supporting our employees, turning our assets and allocating capital appropriately while maintaining a strong and highly flexible capital position.
It's difficult to know if the fed is done hiking rates for this economic cycle and trying to guess when they all moved to cut rates is challenging. So we will remain disciplined in how we manage our business will focus on serving our customers supporting our employees, turning our assets and allocating capital appropriately, while maintaining a strong and highly.
Flexible capital position now.
Speaker 3: Now let me turn the call over to Bob for a detailed analysis of our kids' results.
Now, let me turn the call over to Bob for a detailed analysis of our Q3 results Bob.
Speaker 2: Thanks Ryan. Coltie Group's third quarter results had to what has been an exceptional year for the company because we have grown revenues and earnings generated significant cash flow from operation.
Thanks Ryan.
Multi group's third quarter results add to what has been an exceptional year for the company as we have grown revenues and earnings generated significant cash flow from operations.
Speaker 2: Well, we're not dead. I'm generally strengthen our entire operating plan.
Lowered our debt and generally strengthened our entire operating platform.
Speaker 2: Pacific to our third quarter. OSEAL revenues increased 3% over last year to $3.9 billion.
Specific to our third quarter wholesale revenues increased 3% over last year to $3 9 billion.
Speaker 2: My error revenues for the quota reflect the 2% increase in our average sales price at $549,000.
Higher revenues for the quarter reflect a 2% increase in our average sales price to $549000 and.
Speaker 2: in combination with the less than 1% increase in closings, the 7,076 hole.
In combination with a less than 1% increase in closings.
10076 holes.
Speaker 2: 2% gain in average sales price of homes closed in the quarter was driven by increases of 4% and 6% to remove up an act of adult buyers respectively, partially offset by a 3% decrease.
The 2% gain in average sales price for homes closed in the quarter was driven by increases of 4% and 6% for move up and active adult buyers respectively.
Partially offset by a 3% decrease among first time buyers.
Speaker 2: The Lower ESP among first time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout.
Lower ESPN among first time buyers closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year.
Speaker 2: The mix of homes delivered in the third quarter changed just slightly from the prior end here, as we continue to operate within the range of our stated mix of this.
The mix of homes delivered in the third quarter changed just slightly from the prior year as we continue to operate within the range of our stated mix of business.
Speaker 2: for the quarter. So those are the ones first time buyers represent 30% 38% of
For the quarter closings among first time buyers represented 30% 38% of the business.
Move up buyers totaled 37% and active adult buyers represented 25% of the homes.
Rose.
In the third quarter of last year, 36% of homes delivered for the first time, 38% were move up and 26% for active adult.
Speaker 2: In the third quarter of last year, 36% of homes delivered for first time, 38% were moved up and 26% were active adults.
Speaker 2: Net new orders for the third quarter increased 43% over last year to 7,065 homes. As we realize, you're over your gains in both units and absorption pays across all buyer.
Net new orders for the third quarter increased 43% over last year to 7065 homes as we realized year over year gains in both units and absorption pace across all buyer groups.
Speaker 2: Wars among first time buyers and the third quarter increased 53% over last year, 2,900 79 volts.
Orders among first time buyers in the third quarter increased 53% over last year to $2979.
The gain among move up buyers is even greater as net new orders increased 56% to 2524 homes and.
Speaker 2: The gain of a move up virus is even greater, as net new orders increase 56% to 2524.
Speaker 2: And finally, on a comparable community count, we realized that double-digit gain in sales among active adult buyers has net new orders for the quarter increased to 1,562.
And finally on a comparable community count we realized a double digit gain in sales among active adult buyers as net new orders for the quarter increased to 1562 office.
In the third quarter, we upgraded from an average of 923 communities, which is up 12% over last year adjusting.
Speaker 2: In the third quarter, we operated from an average of 923 communities, which is up to...
Speaker 2: adjusting for community count. The monthly absorption pace in the third quarter of average is 2.5 home.
Adjusting for community count.
Monthly absorption pace in the third quarter averaged two five homes, which is up from 2.0 homes per month in the third quarter of last year.
Speaker 2: which is up from 2.0 homes per month in the third quarter.
Speaker 2: As the percentage of beginning backlog, our cancellation rate of the third quarter was 9%, compared with 8% in the prior year.
As a percentage of beginning backlog our cancellation rate in the third quarter was 9% compared with 8% in the prior year.
Speaker 2: To be clear, on a unit basis, cancellations in the third quarter were down more than 20% from last year.
To be clear on a unit basis cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results of the cancellation rates being comparable.
Speaker 2: But the relative size of our backlog in each period results in the cancellation rate being common.
Speaker 2: Our unit backlog at the end of the quarter was 13,547 homes, compared with 17,053 homes at the end of last year's third.
Our unit backlog at the end of the quarter was 13547 homes compared with $17 53 homes at the end of last year's third quarter.
Speaker 2: On a dollar basis, the value of our ending backlog was 8.1 billion dollars, down from 10.6 billion dollars in the third quarter of last-
On a dollar basis the value of our ending backlog was $8 1 billion down from $10 $6 billion in the third quarter of last year.
Speaker 2: At the end of the third quarter, we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle driving.
At the end of the third quarter, we had a total of 17376 homes under construction.
Is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle times.
Speaker 2: of the home's under construction, 61% were halt sold, and 39% respect.
The homes under construction, 61% were all sold and 39% respectively.
Speaker 2: As we have stated previously, we are comfortable putting spec units into production.
As we've stated previously we are comfortable putting spec units into production, but we're thoughtful about aligning the patient starts with pace of sales helped us to reduce the risk of putting too much inventory on the ground.
Speaker 2: We are thoughtful about aligning the pace of starts with pace of sales to reduce the risk of putting too much inventory on the ground.
Consistent with this measured approach to production of the 6700 spec homes currently under construction fewer than 1000 were finished.
Speaker 2: 6,700 spec homes currently under construction fewer than 1000 were finished
Speaker 2: Given our Q3 community count of 923, we continue to repair approximately one finished spec per community, which is in line with our operating target.
Given our Q3 community count of 923.
We continue to carry approximately one finished spec per community, which is in line with our operating targets.
Speaker 2: Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be a-
Based on the homes, we have in production and as importantly current sales trends.
We expect closings in the fourth quarter to be approximately 8000 homes.
Delivering 8000 homes in the fourth quarter would put us at 29000 for the full year, which is down slightly from our previous guidance for full year closings to be 29500 homes.
Speaker 2: Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full year closing to be 29,500 homes.
Changes in our guide reflects the more challenging affordability conditions, resulting from higher rates as well as the slight shift in our mix toward built to order homes, which won't deliver until 2024.
Speaker 2: Changing our guide reflects the more challenging affordability conditions resulting from higher rates, as well as the slight shift in our mix toward built-to-order homes, which won't deliver until 2021.
Given the mix of homes, we currently expect to deliver in the fourth quarter. We expect our average sales price on closings to be in the range of 540 $550000 periods.
Speaker 2: Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closing to be in the range of $540, to $550,000.
Okay.
Our third quarter wholesale gross margin of 29, 5% continues to lead the industry as we successfully turned our assets, while still achieving high levels of profitability and driving high returns on investment.
Speaker 2: Our third quarter wholesale gross margin of 29.5% continues to lead the industry.
Speaker 2: as we successfully turned our assets while still achieving high levels of profitability and driving high returns on investment.
Speaker 2: Multigroup's reported results benefited from strong margin performance across all buyer groups.
Multi groups reported results benefited from strong margin performance across all buyer groups first time move up and active adult.
Speaker 2: Further as we have talked about on prior calls, our diversified product portfolio is allowing it to capture a higher gross margins that are typically available within our MOBA and active adult.
As we have talked about on prior calls our diversified product portfolio is allowing us to capture higher gross margins that are typically available within our move up and active adult communities.
As I would remind everyone. Our primary focus is always on driving higher returns on invested capital, but we appreciate margins are important contributor to achieving such returns.
Speaker 2: As I would remind everyone, our primary focus is always on driving high returns on investment capital, but we appreciate margins are important, contributing to achieving such concern.
Speaker 2: This is why we remain disciplined and where we locate and how we underwrite our
This is why we remain disciplined in where we locate in how we underwrite our communities and how we design and build our houses and in how we strategically price our homes in the marketplace.
Speaker 2: how we design and build our houses and how we strategically price our homes in the marketplace.
Given the ongoing strength of our margins, we continue to get questions regarding relative margin performance among the larger public builders.
Speaker 2: The Kennedy get questions regarding relative bar to performance among the bar to republic builders.
Speaker 2: I want to quickly address a line of thought that our margins benefit from land positions within our older Delwec, Delweb legacy communities. The reality is that the margins of these communities are common.
To quickly address a line of thought that our margins benefit from land positions within our older del Webb del Webb legacy communities.
The reality is that the margins in these communities are comparable to the rest of our active adult business. So they are an inflating our aggregate numbers.
Speaker 2: That being said, I'm pleased to say that we expect to continue delivering high margins, continue to expect home-sil gross margins, be in the range of 29% to 29.5% in the fourth quarter.
Being said I'm pleased to say that we expect to continue delivering high margins continue to expect wholesale gross margins be in the range of 29% to 29, 5% in the fourth quarter.
Speaker 2: given current interest rates, demand and cost dynamics, we would expect it to be...
Given current interest rates demand and cost dynamics we.
We would expect to be towards the lower end of this range.
SG&A expense in the third quarter totaled $353 million or nine 1% of home sale revenues. This.
Speaker 2: SGNA expense in the third quarter told $353 million for 9.1% of home sale revenue.
Speaker 2: This contairs with prior URS DNA expensive $350 million for 9.2% of home sale rent.
This compares with prior year SG&A expense of $350 million or nine 2% of home sale revenues.
Speaker 2: Based on anticipating closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately 8.8%.
Based on anticipating closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately eight 8%.
Yeah.
Speaker 2: The third quarter, pre-tax income from financial services was $29 million up from $27.5 million last-
In the third quarter pre tax income from financial services was $29 million up from $27 $5 billion last year.
Speaker 2: While marking conditions remain highly competitive for our financial services operations.
While market conditions remain highly competitive for our financial services operations.
Speaker 2: The business benefit from a higher capture rate of 84%, compared with 77% last year.
This has benefited from a higher capture rate of 84% compared with 77% last year.
Speaker 2: The large increase in catchery relates to the expanded use of rate-based incentives which are executed for our mortgage operation.
The large increase in capture rate relates to the expanded use of rate based incentives, which are executed through our mortgage operations.
Speaker 2: Looking at our taxes consistent with our prior guide, our third quarter tax expense was $209 million, or an effective tax rate of 24.6.
Looking at our taxes consistent with our prior guide our third quarter tax expense was $209 million or an effective tax rate of 24, 6%.
Speaker 2: For the fourth quarter, we continue to guide to a tax rate of $24.5 million.
For the fourth quarter, we continued to guide to a tax rate of 24, 5%.
Multi group's bottom line results show net income for the quarter of $639 million or $2 90 per share, which is up from prior year net income of $628 million.
Speaker 2: Multi-groups bottom line results show an income for the quarter of $639 million for $2.90 per share which is up for prior year net income of $628 million for $2.
$2 69 per share.
Given the ongoing financial strength and cash flow generation of our business, we repurchased three 8 million shares for $300 million in the quarter.
This is up from $180 million last year and $250 million in the second quarter of this year.
In the third quarter, we also elected.
To allocate capital towards paying down a portion of our debt.
Speaker 2: In total, we retired $65 million of our 2026 and 2027 senior notes through open market transactions. That price is slightly below par.
In total we retired $65 million of our 2026 and 2027 senior notes through open market transactions at prices slightly below par.
Speaker 2: In conclusion of these transactions, we lowered our debt to capital ratio to 15.5%, which is down 220 basis points from the start of 23, and down 600 basis points from the third quarter of 22.
Inclusive of these transactions, we lowered our debt to capital ratio to 16, 5%.
Which is down 220 basis points from the start of 'twenty, three and down 600 basis points from the third quarter of 2002.
Speaker 2: adjusting to the $1.9 billion cash on our valedictive quarter end. Our net debt to capital ratio was less than one.
Adjusting for the $1 $9 billion of cash on our balance sheet at quarter end, our net debt to capital ratio was less than 1%.
Beyond buying back our equity and debt in the third quarter. We also invested $1 2 billion in the business through land acquisitions development, which keeps us on track to invest upwards of $4 billion in 2023.
Speaker 2: Beyond buying back our equity in debt in the third quarter, we also invested $1.2 billion in the business to land acquisition of the bill.
Speaker 2: keeps us on track to invest upwards of $4 billion in 2020.
Speaker 2: Almost two-thirds of our investment in the third quarter was for the development of our existing land.
Almost two thirds of our investment in the third quarter was for the development of our existing land assets.
Inclusive of our Q3 spend we ended the quarter with approximately $223 223000 lots under control of which 53% of our held via option.
Speaker 2: We're in the inclusive of our P3 spend. We ended the quarter with approximately 223, 223,000 lots under control of which 53% are held via hop.
Speaker 2: We continue to systematically rebuild the optionality of our land pipeline after having walked away from select land positions in the back half of 2022.
We continue to systematically rebuild the optionality of our land pipeline after having walked away from select land positions in the back half of 2022.
As part of this rebuilding process.
Speaker 2: Consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures.
Consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures.
Speaker 2: Today, we've completed land back and transactions for approximately 5,000.
We've completed land banking transactions for approximately 5000 lives.
Speaker 2: Going forward, we will look to use such land banking facilities in order to create optionality in situations where the underlying spell of requires a bulk staff.
Going forward, we will look to use such land banking facilities in order to create optionality in situations, where the underlying sell it requires a bulk sale.
Speaker 2: Discipline process as we work to balance land costs returns and risks, but we are gaining momentum in our effort
It's a disciplined process as we work the balanced land cost returns and risks, but we are gaining momentum and our efforts.
Speaker 2: We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed, and we continue to develop most of the lots that we acquire.
We're also getting more questions on our land pipeline. So let me add that about one third of the lots we have under control are developed and we continue we continue to develop most of the lots that we acquired.
Speaker 2: as a large home builder, assuming your confidence in the third-party disability consistent we deliver developed by time.
As a large homebuilder, assuming your confidence in the third party's ability to consistently deliver developed thoughts on time.
Speaker 2: The decision to purchase finish lines versus raw dirt comes down to return.
The decision to purchase finished lots versus raw dirt comes down to return.
Speaker 2: Finish lots cost more, but can turn faster. Whereas the lower cost of undeveloped blocks can drive higher margins, but the land is on balance sheet for a little longer.
Finished lots cost more but can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer.
Speaker 2: all of our land transactions, we assess how best to drive higher risk-adjustive returns and to find opportunities and deals for finished pendoora on the VELP plants. Now let's...
And all of our land transactions, we assess how best to drive higher risk adjusted returns and to find opportunities with deals for finished or undeveloped lots.
Now, let me turn the call back to Ryan.
As you would anticipate given our 43% increase in net new orders, we saw strong demand throughout the quarter.
Speaker 3: As you would anticipate, given our 43% increase in that new orders, we saw strong demands throughout the quarter.
Speaker 3: 23 displayed more typical seasonality than we have experienced in the three years since COVID as absorption-paced east as we move through the quarter. Demand has been a little chopier in the first few weeks of October with more volatility in the day-to-day sales number.
Q3 displayed more typical seasonality than we have experienced in the three years since COVID-19 as absorption paced eased as we move through the quarter demand has been a little choppy here in the first few weeks of October with more volatility in the day to day sales numbers.
Speaker 3: I'm sure for some buyers, higher rates have pushed affordability just that much further away, while others may be worried about their jobs. For other buyers, what will unrest may simply have them thinking of other things.
And I'm sure for some buyers higher rates were pushed affordability just that much further away while others may be worried about their jobs for other buyers global unrest may simply have them thinking of other things.
Speaker 3: We are fortunate to have an experienced operating team that will make adjustments if and when needed.
We are fortunate to have an experienced operating team that we'll make adjustments if and when needed.
Speaker 3: On a year-over-year basis, for the first nine months of 2023, we have increased net income by $156 million and increased earnings per share by 17%.
On a year over year basis for the first nine months of 2023, we have increased net income by $156 million and increased earnings per share by 17% over.
Speaker 3: Over the same period, we've increased our cash position by approximately $1.6 billion while dropping our net debt to capital ratio effectively to zero.
Over the same period, we've increased our cash position by approximately $1 $6 billion, while dropping our net debt to capital ratio effectively to zero.
Speaker 3: and based on guidance that we've given, we look forward to delivering exceptional, full-year results for 2023.
And based on guidance that we've given we look forward to delivering exceptional full year results for 2023.
Speaker 3: from population growth and demographics to supply dynamics.
From population growth and demographics to supply dynamics.
Speaker 3: and the tremendous opportunity for wealth creation through home ownership. We are bullish on long-term housing.
And the tremendous opportunity for wealth creation through homeownership, we are bullish on long term housing demand.
Abby: Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup Inc, third quarter 2023 earnings conference call.
Speaker 3: Over the near term, however, we fully appreciate the affordability challenges being created by higher mortgage rates and the potential impacts from an economic slowdown the Federal Reserve is hoping to bring about.
Over the near term. However, we fully appreciate the affordability challenge is being created by higher mortgage rates and the potential impacts from an economic slowdown the federal reserve is hoping to bring about.
Abby: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone key pad. If you would like to withdraw your question, press star one a second time.
Speaker 3: As such, we remain disappointed how we operate our business, particularly as it relates to investing in land, the pace of production, the allocation of capital, and the quality of homes and experience we deliver to our customers.
As such we remain disciplined in how we operate our business, particularly as it relates to investing in land.
<unk> production the allocation of capital and the quality of homes and experience, we deliver to our customers.
Speaker 3: We have a clear and successful operating model against which we have been executing for over a decade.
We have a clear and successful operating model against which we have been executing for over a decade. So decision making throughout the organization is consistent and actions are implemented quickly. This.
Jim Zumer: Thank you and I will now turn the conference over to Mr. Jim Zumer, Vice President of Investor Relations. Mr. Zumer, you may begin. Great. Thank you Abby. We appreciate everyone joining today's call to discuss PulteGroup's third quarter operating and financial results. As detailed in this morning's earnings release, PulteGroup delivered another quarter of strong earnings as we continue to capitalize on our competitive strengths and balanced approach to the distance.
Speaker 3: So decision making throughout the organization is consistent and actions are implemented quickly.
Speaker 3: This strong organizational foundation, along with tremendous financial strength, has pulled the group well positioned for ongoing success. In closing, I want to thank the entire team at Pulltie Group.
This strong organizational foundation, along with tremendous financial strength has pulled the group well positioned for ongoing success in closing.
Jim Zumer: Joining me on today's call to discuss our few three results for Ryan Marshall, President CEO, Volshanasi, Executive Vice President, CFO, and Jamal Sowski, Senior Vice President, Finance. Copy of our earnings release in this morning's presentation slide have been posted to our corporate website at PulteGroup.com. We'll post an audio replay of this call later today.
I want to thank the entire team at Pulte group.
Speaker 4: for their tremendous effort in delivering for our homebuyers, our shareholders, and each other. I am so proud of what you accomplish every day. Let me turn the call back to Jim so we can begin Q&A. Thanks, Ryan. 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. Abby, we're ready to open.
For their tremendous efforts in delivering for our homebuyers are shareholders and each other I am so proud of what you accomplish everyday let me turn the call back to Jim. So we can begin Q&A. Thanks, Brian We're now prepared to open the call for questions. So we can get to me. So we can get to as many questions as possible.
The remaining time of this call we ask that you limit yourself to one question and one follow up.
I mean, we're ready to open now for Q&A.
Jim Zumer: We want to inform everyone that today's discussion includes forward looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments. 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 on RSVC's filings, including our annual and quarterly reports.
Speaker 1: Thank you. And as a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. Pressing star one a second time will remove your line from queue. And we will pause for just a moment to compile the Q and a roster.
Thank you.
And as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad pressing star one a second time, we will remove your line from Q.
And we will pause for just a moment to compile the Q&A roster.
Speaker 5: We will take our first question from Carl Reichart with BTIG. Your line is open. Thanks. Morning, guys. I wanted to first just ask about the cycle time numbers. You talked about 140 trying to get down below 100 next year. So, that's more than a month off. What specifically, Ryan, needs to happen for those numbers to go down? Where are the best and most obvious leverage?
And we will take our first question from Carl Reichardt with <unk>. Your line is open. Thanks, good morning, guys.
One of the first just ask about the cycle time numbers, you talked about 140, <unk> trying to get down below 100 next year. So that's more than a month off what specifically Ryan needs to happen to the for those numbers to go down where are the best and most obvious lever points.
Ryan Marshall: Now let me turn the call over to Ryan. Thanks, Jim, and good morning. As we will discuss over the next several minutes, PulteGroup reported another quarter about standing and for a number of key metrics, record financial results. Our potential performance demonstrates once again the importance of PulteGroup's balanced and differentiated operating model. Leveraging our broad geographic footprint and diversified product offering, we are working to maintain significant market share among all major buyer groups.
Yeah, Karl So a lot of the work has already been done and what we're seeing is some of the homes that are delivering.
Speaker 3: Yeah, Carl, so a lot of the work has already been done and what we're seeing is some of the homes that are delivering.
Speaker 3: now and maybe more better said, the homes that are starting now are on cycle times that will yield that overall cycle time of below a hundred days. So it's really about getting kind of the older stuff that's been in the pipeline that's got longer cycle time that is those numbers close out. I think we'll see our overall cycle times come in line with that target of a hundred days.
Now and maybe more better said the homes that are starting now are on cycle times that will yield that.
Ryan Marshall: At the same time, we are successfully executing both large-scale spec and built-to-order home building businesses. Our spec business allows us to more cost-efficiently serve first-time buyers, while our built-to-order business caters to move up and active adult buyers looking to personalize their home location and design features. Specific to our financial results, I am extremely proud of our entire organization for their efforts in delivering third quarter results that include a 43% increase in orders, industry leading gross margins of 29.5%, record third quarter earnings of $2.90 per share, and a return on equity that exceeded 30%.
Overall cycle time of below 100 days, so it's really about getting kind of the older stuff that's been in the pipeline.
Scott longer cycle times that as those numbers close out I think we will see.
Our overall cycle times come in line with that target of 100 days.
Alright, Thanks, and then you mentioned the Choppiness in October and I wondered if you could expand a little on that and talk a little bit maybe about.
Speaker 5: All right, thanks, Ryan. And then you mentioned the chopping has been October , and I wondered if you could expand a little on that and talk a little bit maybe about performance among the three segments in the month so far or particular markets. And then also from a cancellation perspective, if that's beginning to sort of impact you in October too.
Performance among the three segments in the months, so far or particular markets and then also.
From a cancellation perspective, if that's beginning to sort of impact you in October too yes.
Speaker 3: Yeah, Carl, happy to talk on October . And as I mentioned in the prepared remarks, we've seen sales in October while good, they've been a little bit choppier than
Yes, Karl happy to talk on October and as I mentioned in the prepared remarks, we've seen sales in October while good they've been a little bit choppy years then.
Ryan Marshall: In the quarter, I would highlight our active built business as an important contributor to our sign-up growth and our gross margin performance. In an operating environment where rising mortgage rates are creating increasing affordability challenges, 47% of our bill-width purchasers were cash buyers. This is up from 33% just two years ago. Along with largely being cash buyers, these are customers who can afford the premium lots and upgrades that make active adult our highest margin business.
Speaker 3: you know the day-to-day kind of numbers have been a little chop here. I think that you know the biggest thing that I'd want you to hear is that similar to what we saw in the third quarter, we actually have seen a return to what we would consider seasonal type sign-up trends that we experience pre-COVID.
The day to day kind of numbers have been a little choppy.
I think the biggest thing that I'd want you to hear is that similar to what we saw in the third quarter. We actually have seen a return to what we would consider seasonal type sign up trends that we experienced pre COVID-19.
Speaker 3: And we've seen that continue into October .
And we've seen that continue into October .
Speaker 3: on an absorption rate, the numbers that we're seeing on absorption is per community, are pretty similar to what we saw in 2018 and 2019. Pretty COVID levels, which were pretty healthy. So, you know, all things considered.
On an absorption rate.
Ryan Marshall: Just to demonstrate the brand power of the Dell Web Name, in June we opened Dell Web Kensington Ridge in Michigan, not a market you might consider a hotspot for retirees. In a community where base home prices range from three hundred and seventy thousand dollars to north of six hundred thousand dollars. We have already sold 114 houses in just over 100 days. We fully appreciate that to some degree all buyers are impacted by rising rates and macro economic concerns.
The numbers that we're seeing on absorptions per community are pretty similar to what we saw in 2018 in 2019.
Pre COVID-19 levels, which were pretty healthy so all things considered we feel pretty good about the continued ongoing desire for homeownership.
Speaker 3: You know, we feel pretty good about the continued ongoing desire for home ownership. And you know, it's not lost on any of you about their listening rates matter. And, you know, there's been a lot of rate movement over the last 30 days. And so I think the consumer, all things considered, has handled that really well. Wait, I-
It's not lost on any of you out there listening rates matter.
Theres been a lot of rate movement over the last 30 days and so I think the consumer all things considered is handled it really well.
Ryan Marshall: The buyer groups can absolutely behave differently over the course of a housing cycle. For PulteGroup, we believe being diversified across all buyer groups can enhance both growth and stability. Beyond your diversification across buyer groups, PulteGroup's strong third quarter financial performance also benefited from our ability to offer consumers both spec bill and build the order homes. As we've discussed on prior calls over the past 24 months, we have transitioned our first time buyer communities to a spec build model to better serve these customers.
Great I appreciate the color thanks Bill.
And we will take our next question from Matthew Bouley with Barclays. Your line is open.
Speaker 1: And we will pick our next question from Matthew Boulay with Barclays. Your line is open.
Speaker 6: Hey, good morning, guys. Thank you for taking the questions, you know, just a question around some of the comments you made at the top Ryan around addressing affordability and some of the challenges you're seeing, particularly with the first time buyer, you know, any additional elaboration on what you're doing with incentives and rate buy downs and, you know, what's working and not working as we get into September and October , you know, and sort of the margin implications of all that. Thank you.
Hey, good morning, guys. Thank you for taking the questions.
Just a question around some of the comments you made at the top Ryan around addressing affordability in some of the challenges you are seeing particularly with the first time buyer.
You know any additional elaboration on what youre doing with incentives and rate buy downs and you know, what's working and not working as we get into September and October and sort of the margin implications of all that thank you.
Ryan Marshall: Looking at our first-time business, spec building allows us to maintain a more consistent cadence of start in those communities which drives construction efficiencies and is important in working with our trades. More directly to our quarter having additional inventory available was important given 49% of our sales in the period where spec sales. I would note that 49% spec sales in the quarter is down from 58% in Q1 of this year. I think the decrease in the relative percentage of spec sales in the quarter reflects two interesting dynamics.
Speaker 3: Yeah, Matt, thanks for the question. We continue to use the permanent 30 year buy down as probably a most powerful incentive. Right now we've got national incentives that offer 5.75% on a 30 year fixed. So, you know, I think given
Yeah, Matt. Thanks for the question, we continue to use the the permanent 30 year buy down is probably the most powerful incentive right now we've got national incentives that offer 575% on a 30 year fixed so I.
I think given.
Speaker 3: rates today on the open market would be over 8%, to be able to get a new home in a great location of the quality and the design features that we have at 5.75% I think is pretty powerful. You know, I'll remind everybody what we've done is we've simply redistributed incentives that we've historically offered.
Rates today on the open market would be over 8%.
To be able to get a new home in a great location of the quality and the design features that we have that 575% I think it's been a pretty powerful.
I'll remind everybody what we've done is we've simply redistributed incentives that we have historically offered toward cabinets and countertops and and things of that nature, we've redirected those two interest rate incentives.
Ryan Marshall: On one hand, the affordability challenges caused by higher interest rates are pushing some buyers particularly first-time buyers to the sidelines for now. On the other hand, more affluent buyers who are less fearful about rates are comfortable contracting for a home where they've selected the lot, the floor plan and the design options. On the construction side, I'm pleased to say that we continue to shorten our production cycle. Just to remind people, pre-COVID our production cycle was approximately 90 work days.
Speaker 3: and we've re-directed those two interest rate incentives. And I think that's been the most powerful thing for that, for that buyer.
And I think that's the that's been the most powerful thing for that for that buyer group.
Speaker 6: Got it. Okay, that's really helpful. But then secondly, just one on stick and break costs, you know, just as your...
Got it Okay. That's really helpful. And then secondly, just one on stick and brick costs.
Just as your.
Speaker 3: you know, addressing these issues and presumably there is margin pressure out of that, you know, and the housing market has evolved here. What are you guys doing around construction costs, labor, sort of ability to kind of push back on all that? You know, how should we think about that over these next few months? Thank you. Yeah, well, you know, look, inflation's real and, you know, we've previously talked about, you know, something in the neighborhood of 8 to 9 percent year-over-year inflation. That doesn't community for centuries raise in that segment in the therapy department of housing.
Dressing these issues and then presumably there is margin pressure out of that you know and the housing market has evolved here.
Ryan Marshall: At its worst, this number ballooned to 170 days. By the end of the quarter, we had reduced this number to about 140 days. Our teams continue to shave days and weeks to off our build cycle and we remain optimistic about our ability to get back below 100 days in 2024. As you would expect, cutting more than a month off of our cycle time has positively impacted our cash flow, which we continue to allocate across our key business priorities.
What are you guys doing around construction costs.
Labor or sort of ability to kind of push back on all of that you know how should we think about that over these next few months. Thank you, yes, well look inflation is real.
We've previously talked about.
Something in the neighborhood of 8% to 9% year over year inflation, which I think is part of the reason we are in the rate environment that we're in as the fed is trying to get a handle on that.
Speaker 3: which I think is part of the reason we're in the rate environment that we're in as the feds trying to get a handle on that. What we've seen on our cost of build is on a year over year basis we've actually flat. Now that's
Ryan Marshall: Through the first nine months of 2023, we have invested $3 billion in our business through land acquisition and development. Over the same period, we have returned over $800 billion to shareholders through Sherry purchases and dividend. In this most recent quarter, we even took advantage of market conditions to retire $65 million near-term debt at prices just below par. PulteGroup has delivered outstanding operating and financial performance in the quarter and throughout the first nine months of the year as we have leveraged our strong competitive position to capitalize on fire demand.
What we've seen on our cost to build is on a year over year basis, we've actually we're actually flat now.
That's a lot of commodity and material and labor increase.
Speaker 3: commodity and material and labor increase in a number of categories that's been offset by lumber say
A number of categories, that's been offset by lumber save.
Speaker 3: So, headline is, we're flat on a price per square foot to build year over year, but it's a lot of increases in material and labor off-step by lumber.
So headline is we're flat on a price per square foot to build year over year, but it's a lot of increases in material and labor offset by lumber.
Got it thanks, Brian and good luck guys.
Okay.
We will take our next question from Michael Rehaut with Jpmorgan. Your line is open.
Speaker 1: We will take our next question from Michael Reho with JP Morgan. Your line is open. Uh, thanks.
Ryan Marshall: It grows increasingly clear that federal reserve actions to raise interest rates are having the desired effect of slowing the economy, although the speed of deceleration has been slower than expected, given the unprecedented ramp in rates. While arguably not the most supportive economic backdrop, new home demand in 2023 has benefited from a robust jobs market and rising wages, financially resilient consumers and a continuing dearth of supply from the existing home market. And finally, the higher rates begin to bite.
Yeah.
Thanks, Good morning, everyone.
Mike.
Just wanted to.
And I take a step back and understand some of the dynamics you talked about you know October being choppy, but at the same time.
Ryan Marshall: We responded with adjustments in product, pricing, and incentive programs that successfully address consumers' biggest pain point affordability. It's difficult to know if the Fed has done hiking rates for this economic cycle and trying to guess when they will move to cut rates of challenging, so we will remain disciplined in how we manage our business.
It sounds like more in line with.
Seasonality pre COVID-19.
And you also.
The flipside of that is you know with volume.
You are putting out a gross margin guidance for the fourth quarter.
Maybe a touch down from <unk>.
Speaker 7: You know, can we just give us a sense of, you know, the level of the sentence if, you know, through your own
Can you just give us a sense of.
You know the level of incentives.
Through your own.
Speaker 7: offerings in October or maybe even more broadly in the marketplace. Have you feel like incentives have started to come up over the last couple of months? Because certainly I guess in the near term, you're looking for a similar gross margin. And maybe just more broadly, how you feel the market is reacting to, you know, September and October .
Offerings in October or maybe even more broadly in the marketplace have you feel like incentives have started to come up over the last couple of months, because certainly I guess in the near term.
Ryan Marshall: We'll focus on serving our customers, supporting our employees, turning our assets and allocating capital appropriately, while maintaining a strong and highly flexible capital position.
Looking for a similar gross margin.
And maybe just more broadly how you feel the market is reacting to sell.
Bob: Now, let me turn the call over to Bob for a detailed analysis of our kids' results. Bob. Thanks, Ryan. PulteGroup's third quarter results had to what has been an exceptional year for the company because we have grown revenues and earnings generated significant cash flow from operations. Lowered our debt and generally strengthen our entire operating platform. Specific to our third quarter, home sale revenues increased 3% over last year to $3.9 billion. I owe revenues for the quarter reflect a 2% increase in our average sales price to $549,000 in combination with a less than 1% increase in closings to 7,076 homes.
September and October .
Speaker 3: Yeah, Mike, I'll take part of that and then I'll have Bob talk about the incentive load, but it was demonstrated by our orders in the quarter. We had 43% growth in new orders and it was a number.
Yeah, Mike I'll take a part of that and then I'll have Bob talk about the incentive load, but as demonstrated by our orders in the quarter, we had 43% growth in new orders and it was a number Oh you know of over 7000. So I think we've clearly demonstrated that we have.
Speaker 3: you know, over 7,000. So, you know, I think we've clearly demonstrated that we've got the ability to sell homes you've heard.
Got the ability.
To sell homes.
Heard you've heard.
Speaker 3: You've heard me talk about not being margin proud, but at the same time, we're not gonna give away price and incentives that we don't have to.
We talk about not being margin proud, but at the same time, we're not going to give away price and incentives that we don't have to and I think we did exactly that in the third quarter.
Bob: The 2% gain in average sales price to homes close in the quarter was driven by increases of 4% and 6% to remove up an act of adult buyers respectively, partially offset by a 3% decrease among first-time buyers. The Lower ESP among first-time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year. The mix of homes delivered in the third quarter changed just slightly from the prior year, as we continue to operate within the range of our stated mix of business.
Speaker 3: And I think we did exactly that in the third quarter. And we've continued to kind of focus on making sure that we're turning the asset and we're getting.
And we've continued to kind of focus on making sure that we're turning the asset and we're getting the number of absorptions that we need in every single community too.
Speaker 3: you know, the number of absorptions that we need in every single community to deliver the best return on the best capital that we can. So, well, I think it was a great quarter. We're happy with how, you know, sign up to perform to October . You know, you heard me kind of talk about that on the question that Carl asked, so I won't repeat it. And then Bob, if you can, maybe just talk a little bit about the incentive load.
To deliver the best return on invested capital that we can so well.
Look I think it was a great quarter, we're happy with how sign ups performed on October <unk>.
You heard me kind of talk about that on the question that Karl asked so I won't repeat it.
Bob: For the quarter, closings in one first-time buyers represented 38% of the business. Move-up buyers totaled 37% and active adult buyers represented 25% of the homes close. In the third quarter of last year, 36% of homes delivered for first time, 38% were moved up and 26% were active adults. Net new orders for the third quarter increased 43% over last year to 7,065 homes, as we realize year-over-year gains in both units and absorption pays across all buyer crews.
Then Bob if you can maybe just talk a little bit about the incentive load.
Speaker 2: Yeah, Mike, you know, you can see in our data, you know, we've got about a 6%
Mike.
As you can see in our data we've got about a 6%.
Speaker 2: Incentive load that's $35,000 a unit rough bath That actually is down 10 base
Incentive load that's $35000 a unit rough math.
That actually is down 10 basis points from Q.
Speaker 2: Two of this year it is certainly not that was 2.2% last year But you know the sales environment that led to the closings in Q Q3 of last year were dramatically different So you can see kind of a normalization here at 6% I think you can take from our margin guides from Q3 that what we see closing in the in the fourth quarter and we've got pretty good visibility It's at this moment
Two of this year. It is certainly up it was two 2% last year, but.
The sales environment that led to the closings in Q Q3 of last year were dramatically different.
So you can see kind of a normalization year, 6%.
Bob: Wars among first-time buyers in the third quarter increased 53% over last year, to your 2,979 goals. The gain among move-up buyers is even greater, as net new orders increase 56% to 2,524 homes. And finally, on a comparable community count, we realize the double-digit gain sales among active adult buyers, as net new orders for the quarter increased to 1,562 homes. In the third quarter we operated from an average of 923 communities, which is up 12% over last year.
I think you can take from our margin guide from Q3 that what we see closing in the fourth quarter and we've got pretty good visibility into at this moment.
We will not be significantly impactful I would highlight.
Given a continuation of that same guide at 29 to 29, 5% on margins. We have told you we're going to be at the lower end of that so there is some cost to this interest rate environment.
Right now.
Speaker 7: Right now, appreciate that Bob. I guess secondly, maybe bigger picture conceptually. You talked about earlier in the call.
Hate that Bob.
I guess secondly, maybe bigger picture conceptually need you talked about earlier in the call.
Bob: Adjusting for community count, the monthly absorption base in the third quarter averaged 2.5 homes, which is up from 2.0 homes per month to the third quarter of last year. As a percentage of beginning backlog, our cancellation rate in the third quarter was 9% compared with 8% in the prior year. To be clear, on a unit basis, cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results in the cancellation rate being comparable.
Speaker 7: questions around your higher gross margin versus your peer group. When you think about the 6%
Questions around your higher gross margin versus your peer group when you think about the 6%.
Speaker 7: today versus 2% a year ago. And I don't know if that's 6%. I want to say it's a little bit above your longer term average maybe around 3.
Today versus 2% a year ago.
And I didn't know if that 6% I want to say, it's a little bit above your longer term average maybe around three.
Speaker 7: How does that square with the level of gross margins you're generating today? And if you think about over the next couple of years, they'll become more generic.
How does that square with the level of gross margins you're right.
Generating today and if you think about over the next couple of years.
Bob: Our unit backlog at the end of the quarter was 13,547 homes, compared with 17,053 homes at the end of last year's third quarter. On a dollar basis, the value of our ending backlog was 8.1 billion dollars, down from 10.6 billion dollars in the third quarter of last year. At the end of the third quarter we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle products.
Speaker 7: You know, we've heard different things from different builders about maybe increasing hurdle rates from underwriting about, you know, just thinking about how higher cost land perhaps might flow through over the next couple of years. You know, if incentive levels say where they are.
No I mean, we've heard different things from different builders about maybe.
Increasing hurdle rates.
From underwriting about.
Just thinking about how higher cost land, perhaps might flow through over the next couple of years.
He also incentive levels stay where they are.
Speaker 7: Would that suggest kind of a moderation, a little bit from the current level of gross margins? Or how should we think conceptually about the next couple of years, directionally, for this matter?
Would that suggest kind of a moderation.
A little bit from the current level of gross margins.
Or how should we think conceptually about the next couple of years Directionally.
Bob: Of the homes under construction, 61% were sold and 39% were speculated. As we have stated previously, we are comfortable putting spec units into production, but we are thoughtful about aligning the pace of sales to reduce the risk of putting too much inventory on the ground. Consistent with this measured approach to production of the 6,700 spec homes currently under construction, fewer than 1,000 were finished. Given our Q3 community count of 923, we continue to carry approximately one finished spec per community, which is in line with our operating targets.
For this metric.
Yeah, Mike.
Speaker 3: Yeah Mike, you know our crystal ball, you know, at this point a couple of years out, we're not there yet. You know, we're still kind of focused on Q4. We've given a guide for that quarter when we get to kind of the end of Q4, we'll, you know, or certainly give a full year guide for the balance of 2024. But, you know, maybe the thing I do want to address is the incentive load that we currently
Our crystal ball at this point a couple of years out we're not there yet.
We're still kind of focused on Q4, we've given a guide for that quarter. When we get to kind of the end of Q4 will certainly give a full year guide for the balance of 2024, but maybe.
Maybe to the thing I do want to address is the incentive load that we currently have.
Speaker 3: that is allowing us to offer incentives on the interest rate. That's been in our margin guide for the entire, our margin guide and our results for the entire year.
It's allowing us to offer.
Incentives on on the interest rate that's been in our margin guide for the entire our margin guide and our results for the entire year. So.
Bob: Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be approximately 8,000 homes. Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full year closings to be 29,500 homes. Changing our guide reflects the more challenging affordability conditions resulting from higher rates, as well as the slight shift in our mix toward built-to-order homes, which won't deliver until 2024.
Speaker 3: So you're seeing the impact of offering.
Youre seeing the impact of offering.
Below market interest rates as an incentive it's been in Q2. The results. It's been it was in our Q3 results and it's in our Q4 guide.
So no no guidance about what margin direction will be beyond Q4 of this year.
Bob: Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closings to be in the range of $540 to $550,000 in the areas. Our third quarter on sale gross margin of 29.5% continues to lead the industry, as we successfully turned our assets while still achieving high levels of profitability and driving high returns on investment. Multi-groups reported results benefited from strong margin performance across all buyer groups, first time move up and active adult.
But but that's all embedded in our <unk> to this point everything that we've been doing.
That's embedded in the results that we've delivered in the guide that we've given.
Thanks I appreciate it.
Thanks, Greg.
And we will take our next question from Joe <unk> with Deutsche Bank. Your line is open.
Hey, good morning, everybody. Thanks for taking the question.
And I appreciate the data point about the active adult community in Michigan, hopefully snow removals included in that HOA fee.
Bob: Further, as we have talked about on prior calls, our diversified product portfolio is allowing it to capture higher gross margins that are typically available within our group up and active adult, as I would remind everyone, our primary focus is always on driving high returns on invested capital, but we appreciate margins are important contributing to achieving such concerns. This is why we remain disciplined and where we locate and how we underwrite our communities and how we design and build our houses and how we strategically price our homes in the market place.
Joe.
Good.
But market conditions, that's what's going to determine the margin volume and price into next year.
I think it's an underappreciated element of your business of course that the composition of that can vary right within the definition of success, but you are obviously appropriately acknowledging the headwinds here, maybe if you could just talk instead to the return headwind from this instead of either the absorption headwind.
Bob: Given the ongoing strength of our margins, we continue to get questions regarding relative margin performance among the larger public builders. I want to quickly address a line of thought that our margins benefit from land positions within our older Delwek, Delweb legacy communities. The reality is that the margins of these communities are comparable to the rest of our active adult businesses, but they are in inflating our aggregate numbers. That being said, I'm pleased to say that we expect to continue delivering high margins, continue to expect home sale gross margins, be in the range of 29% to 29.5% in the fourth quarter.
The gross margin headwind just how are you thinking about returns on capital and then similarly returns on inventory if interest rates remain high at basically a zero debt now just.
How youre thinking about ROE relative to ROI.
Yes, Joe Thanks for the question and I'll do my best to give you an answer for.
For the last decade.
Maybe even going on 12 years the way that we've operated the business has been with a singular focus on delivering the best possible return on invested capital that we can.
Bob: Given current interest rates, demand and cost dynamics, we would expect to be toward the lower end of this range. SGNA expense in the third quarter told $353 million for 9.1% of home sale revenues. This contares with prior year SGNA expense of $350 million for 9.2% of home sale revenues. Based on anticipating closing volumes for the fourth quarter, we expect SGNA and the fourth quarter to be approximately 8.8%. In the third quarter, pre-tax income from financial services was $29 million, up from $27.5 million last year.
Given the capital intensive nature of this business.
For Us we think that's the best way to make decisions and to operationalize.
A offer as we operationalize our platform in a way that delivers high return on assets high return on equity whatever metric you want to look at I think we've clearly done that and.
Highlighted in my prepared remarks that for the trailing 12 months, we delivered return on equity over 30% and part of that is derived from running a good business, but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes, we were paying a dividend.
Bob: While market conditions remain highly competitive for our financial services operations, the business benefited from a higher capture rate of 84%, compared with 77% last year. A large increase in catcher rate relates to the expanded use of rate-based incentives which are executed for our mortgage operation. Looking at our taxes consistent with our prior guide, our third quarter tax expense was $209 million or an effective tax rate of 24.6%. For the fourth quarter, we continue to guide to a tax rate of 24.5%.
We've bought back.
You know near 45% of the company.
Over the last 10 to 12 years that we've had on our share buyback program in place and we just highlighted this quarter. We opportunistically took advantage of the opportunity to buy some debt in the near term debt in that it was trading below par so.
You know I think maybe the best way I can describe it Joe we're going to continue to focus on.
Bob: Volty groups bottom line results show net income for the quarter of $639 million or $2.90 per share, which is up for prior year net income of $628 million or $2.69 per share. Given the ongoing financial strength and cash flow generation of our business, we re-purchased $3.8 million shares from $300 million in the quarter. This is up from $180 million last year and $250 million in the second quarter of this year. In the third quarter, we also elected to allocate capital towards paying down a portion of our debt.
Assets in great spots, turning those in a way that delivers high return on invested capital.
And one of the other kind of things that I think can also continue to give us flexibility and.
Return enhancing leverage is moving our land options to 70%. So we sit at 53 today, we've given you kind of a long term target of 70, we've got things in place and work underway that will help us get there.
Bob: In total, we retired $65 million of our 2026 and 2027 senior notes through open market transaction that prices slightly below par. Inclusive of these transactions, we lowered our debt to capital ratio to 15.5%, which is down 220 basis points from the start of 23 and down 600 basis points from the third quarter of 22. Adjusting to the $1.9 billion cash on our value to the quarter end, our net debt to capital ratio was less than one.
I appreciate all the thoughts Ryan Ah.
Yeah, and as a follow up just maybe on the comment around matching starts to orders should we interpret that as you know roughly 7000 starts in the fourth quarter or is that more of a comment on what the fourth.
Fourth quarter orders look like Thats, what youre starts might look like.
Fourth quarter starts will be more reflective of order trends, we're seeing in the fourth quarter.
We're starting more spec.
Bob: 1% Beyond buying back our equity in debt in the third quarter, we also invested $1.2 billion in the business to land acquisition of the development, which keeps us on track to invest upwards of $4 billion in 2023. Almost two thirds of our investment in the third quarter was for the development of our existing land asset. Inclusive of our P3 spent, we ended the quarter with approximately 223,000 lots under control of which 53% are held via option.
Than we historically have as we've highlighted that we've completely moved our first time business to a stock business. So some of Thats pretty determined based on what we saw in the third quarter and what we would anticipate.
But we're just not going to get into kind of a position, where we've got a buildup of spec inventory.
You know that.
Creates.
That creates pressure to do things that are unnatural on the pricing front.
But we are going to you know put some units in the ground to have those ready for Q1, you saw us do that last year in the back half of last year that set us up for a really strong Q1 of 2023 so.
Bob: We continue to systematically rebuild the optionality of our land pipeline after having walked away from select land positions in the back half of 2022. As part of this rebuilding process, and consistent with our stated strategy of getting more land-like, we are expanding our use of different land-banking structures. Today, we have completed land-banking transactions for approximately 5,000 lots. Going forward, we will look to use such land-banking facilities in order to create optionality in situations where the underlying speller requires a bulk set.
I would want you here balanced approach inventories going into the ground, we're going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we've acknowledged you're out there in this current interest rate environment.
Sounds good thanks a lot.
And we will take our next question from Stephen Kim with Evercore ISI. Your line is open.
Bob: In the discipline process, we work the balanced land costs, returns and risks, but we are gaining momentum in our efforts. We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed, and we continue to develop most of the lots that we acquire. As a large home builder, assuming your confidence in the third-party's ability consistently to deliver developed lots on time, the decision to purchase finished lots versus raw dirt comes down to return.
Yeah, Thanks, very much guys, great job exciting times.
Ryan in your opening remarks, you sort of talked about some of the reasons why some of the ways in which buyers seem to be responding to the rates.
You sort of contrasted.
Or laid out, but there's a psychological component you know maybe math versus mental.
And I'm curious and you talked about the role of buy downs in that.
So.
My first question relates to.
Bob: Finish lots cost more when can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer. In all of our land transactions, we assess how best to drive higher risk adjusted returns and to find opportunities and deals for finished and or under developed lots.
How you think.
What percent, let's do it this way what percent of your buyers are taking the rate buy down.
And when you're negotiating these buy downs.
You've talked about the $5 75 through the end of this year. It looks like where are you setting new locks because I imagine you're negotiating those now for the next batch where are you setting those locks.
Ryan Marshall: Now, let me turn the poll back to right. As you would anticipate, given our 43% increase in that new order, we saw strong demand throughout the quarter. Q3 displayed more typical seasonality than we have experienced in the three-year sun's COVID, as absorption-paced east as we move through the quarter. Demand has been a little chopier in the first few weeks of October, with more volatility in the day-to-day sales numbers. I'm sure for some buyers, higher rates have pushed affordability just that much further away, while others may be worried about their jobs.
From a contracted rate perspective.
Yeah, Hey, David It's Bob.
It's an evergreen process honestly, we are buying.
Contracts typically weekly.
And they are market based.
We set the pricing on that and that determines the price to us to offer that value to the consumer so the rate that Brian talked about is a negotiated price.
Ryan Marshall: For other buyers, global unrest may simply have them thinking of other things. We are fortunate to have an experienced operating team that will make adjustments if and when needed. On a year over your basis, for the first nine months of 2023, we have increased net income by $156 million, an increased earnings per share by 17%. Over the same period, we've increased our cash position by approximately $1.6 billion, while dropping our net debt to capital ratio effectively to zero.
Essentially we filled the cost of providing of being able to provide that contract rate to our consumer.
As an upfront fee for purchasing the contract and then there is the rate buy down as part of that.
And so it's a it's not like we're buying now for three and six months from now.
These are.
Contracts that we enter into that we expect to build candidly within 30 days and typically we're filling them within a week.
So it's.
Ryan Marshall: And based on guidance that we've given, we look forward to delivering exceptional full-year results for 2023. From population growth and demographics to supply dynamics and the tremendous opportunity for wealth creation through home ownership, we are bullish on long-term housing. Over the near term, however, we fully appreciate the affordability challenges being created by higher mortgage rates and the potential impacts from an economic slowdown the Federal Reserve is hoping to bring about.
Yes, it's very market responsive as rates go up it's why you've seen what we've offered has moved up a little bit.
We've increased our cost as part of that to integrate.
So it's a it's a process we've been working through for Josh.
10, or 11 months now since we've put it in place and we found it works pretty well.
So just so I'm understanding that it sounds like you were just talking about or do you have a forward purchase commitment that youre doing on a relatively short term basis, but then you're also layering on top of that.
Ryan Marshall: As such, we remain disappointed in how we operate our business, particularly as it relates to investing in land, the pace of production, the allocation of capital, and the quality of homes and experience we deliver to our customers. We have a clear and successful operating model against which we have been executing for over a decade. So, decision making throughout the organization is consistent and actions are implemented quickly. This strong organizational foundation along with tremendous financial strength has PulteGroup well positioned for ongoing success.
Now an individual rate buy down you know.
AD hoc if you will.
These are 30 year rate buy downs for the consumer.
Steven It out right or the other thing that I would add maybe just to add your conversation is some buyers. They take the available incentives that we have they can get them all the way to 575%.
There are other buyers that decide that they don't need to go all the way to 575% and they'd like to have a little bit higher rate and use some of the other incentive money that we're offering for other things that they see value in so.
Ryan Marshall: In closing, I want to thank the entire team at PulteGroup for their tremendous effort in delivering for our home buyers, our shareholders, and each other. I am so proud of what you accomplish every day.
We're seeing about 80, 80% to 85% of our buyers are getting some form of incentive toward interest rates.
That doesn't mean, everybody will go to 575%.
Jim Zumer: Let me turn the call back to Jim so we can begin Q&A. Thanks, Ryan.
Just some fraction of our total sales and up in the very lowest category.
Abby: We're now prepared to open the call for questions. So we can get to it, excuse me. So as we can get to as many questions as possible during the remaining time of the call, we ask that you limit yourself to one question and one follow-up. Abby, we're ready to open now for Q&A. Thank you. And as a reminder, if you would like to ask a question press star than the number one on your telephone keypad, pressing star one a second time will remove your line from Q.
The big headline is that we've got the tools out there and our sales team has got the tools out there build individually sold what each and every buyer needs to make.
Abby: And we will pause for just a moment to compile the Q&A roster.
The transaction work for them.
Maybe to put a finer point on that.
Ryan said, 80% to 85% of people have incentive program.
Only 25% of the business.
In the quarter was through that National campaign.
Carl Reichardt: We will pick our first question from Carl Reichart with BTIG. Your line is open. Thanks, morning guys. One of the first to ask about the cycle time numbers. You talked about 140 trying to get down below 100 next year. So that's more than a month off. What specifically Ryan needs to happen for those numbers to go down? Where are the best and most obvious lever points? Yeah, Carl, so a lot of the work has already been done and what we're seeing is some of the homes that are delivering now and maybe more better said, the homes that are starting now are on cycle times that will yield that overall cycle time of below 100 days. So it's really about getting kind of the older stuff that's been in the pipeline that's got longer cycle time that is those numbers close out.
You asked about.
So yes, those are targeted to specific inventory units typically, but we offer incentives to all of our consumers we always have.
As Ryan as stated already today.
The vast majority of those those centers now across all of our buyers.
Financing oriented.
Yeah, Okay that was it that was really helpful. Appreciate the all the nuances there.
My My second question relates to getting back to sort of be the seasonality and.
It sounds like you.
You are right now is it seasonality sort of coming back into the business.
Whereas we end up in the fourth quarter, it's a little weird right because the housing market kind of generally slows you know, particularly in the last six weeks of the year and I'm curious as to your posture as you assess the buyers are you anticipating do you generally think that theres relatively more in elasticity on.
Ryan Marshall: I think we'll see our overall cycle times come in line with that target of 100 days. All right, thanks, Ryan.
On the part of the buyer or relatively less elasticity it might be a better way of saying it so that it incentivize. It causes you maybe not to push so aggressively on incentive to try to keep up sales momentum in the last six weeks of the year kind of like pushing on a string is that a reasonable way to be thinking about how you're likely to approach the market over the next six weeks.
Ryan Marshall: And then you mentioned the choppinist in October and I wondered if you could expand a little on that and talk a little bit maybe about performance among the three segments in the month so far or particular markets. And then also from a cancellation perspective if that's beginning to sort of impact you in October 2. Thanks. Yeah, Carl, I'm happy to talk on October. As you know, I mentioned in the the preparing remarks, we've seen sales and in October while good, they've been a little bit chopier than you know the day-to-day kind of numbers have been a little chopier.
Alright, and the last six weeks of the year.
Then lastly regarding at risk you had talked about wanting to evaluate all of your land.
Our land actions in terms of risk adjusted returns.
So running at a super low net debt to cap and I'm curious if you move to lower risk through increase incentive increase land banking would it be reasonable to think you'll also carry increase leverage than you currently are today.
Ryan Marshall: I think that you know the biggest thing that I'd want you to hear is that similar to what we saw in the third quarter, we actually have seen a return to what we would consider seasonal type sign-up trends that we experience pre-COVID and we've seen that continue into October. On an absorption rate, the you know the numbers that we're seeing on absorption per community are pretty similar to what we saw in 2018 and 2019.
Okay.
Yes, Stephen we are.
Barry we are at a lower leverage rate than what we've historically run at and I think that's really more than anything it's a testament to the strength of the business, we've been operating really well and we.
Ryan Marshall: Pretty COVID levels which were pretty healthy. So you know all things considered you know we feel pretty good about the continued ongoing desire for home ownership and you know it's not lost on any of you out there listening rates matter and you know there's been a lot of rate movement over the last 30 days and so I think the consumer all things considered has handled that really well. Wait, I appreciate the color. Thanks, Phil.
They have been generating a lot of cash.
We've really been touching kind of all of the critical parts of our capital allocation philosophy, we've invested a lot of money into land and land development, we've been paying our dividend we bought back.
Highest single quarter.
Spend in shares this year in the third quarter at $300 million and we bought back some debt so.
And with that we still grew the cash balance. So I think I think it's it really demonstrates how strong the business is operating in terms of kind of your question on kind of pricing and discounts in.
Matthew Bouley: And we will take our next question from Matthew Bouley with Barclays. Your line is open. Hey, good morning guys. Thank you for taking the questions. You know, just a question around some of the comments you made at the top, Ryan around addressing affordability and some of the challenges you're seeing, particularly with the first time buyer. You know, any additional elaboration on what you're doing with incentives and rate buy downs and, you know, what's working and not working as we get into September and October, you know, and sort of the margin implications of all that. Thank you.
Elasticity or in elasticity.
We're going to continue to price and set incentives at a level that we think are appropriate for the market, we're going to be responsive, we're not going to be margin proud.
At the same time I think we've got a good understanding of what value is and.
You Shouldnt expect to see kind of the National League ear and blow out Red Tag.
Ryan Marshall: Yeah, Matt, thanks for the question. We continue to use the the permanent 30 year buy down as probably a most powerful incentive right now. We've got national incentives that offer 5.75% on a 30 year fixed. So, you know, I think given, you know, rates today on the open market would be over 8%. You know, to be able to get a new home in a great location of the quality and the design features that we have at 5.75% I think is pretty powerful.
Kind of screaming baby sale from us.
I don't I don't think that helps the consumer.
But I think youre seeing us put the appropriate incentive loads such that returning the asset we're turning the inventory, we're making sure that we're getting.
A minimum of two sales per active community, which is kind of a level that I think you need to be in production of homebuilding to deliver the types of return on assets return on inventory return on invested capital that we want.
Ryan Marshall: You know, I'll remind everybody what we've done is we've simply redistributed incentives that we've historically offered toward cabinets and countertops and things of that nature. We've redirected those to interest rate incentives. And I think that's the, you know, that's been the most powerful thing for that, for that buyer group. Got it. Okay. That's really helpful.
Perfect I appreciate that thanks.
Thanks, guys.
Understood.
We'll take our next question from Ken Zenner with Seaport Research Partners. Your line is open.
Good morning, everybody.
We're again.
Just wanted to delve into the.
Option impact on your margins. So I think you've been saying options have been about 19% of your ASP.
Ryan Marshall: But then secondly, just one on stick and break costs, you know, just as your, you know, addressing these issues and presumably there is margin pressure out of that, you know, and the housing market has evolved here. What are you guys doing around construction costs, labor, sort of ability to kind of push back on all that? You know, how should we think about that over these next few months? Thank you. Yeah. Well, you know, look, inflation is real.
Is that still where we're at.
In terms of.
Yes in terms of the options.
Yeah, we've talked about our options and lot premiums.
Being a consistent driver of value. It's part of the way we go to market. We think it's one of the strengths of our sales process.
Ryan Marshall: And you know, we've previously talked about, you know, something in the neighborhood of 8% to 9% year over year inflation, which I think is part of the reason we're in the rate environment that we're in as defense trying to get a handle on that. What we've seen on our cost of build is on a year over year basis, we've actually actually flat. Now that's a lot of commodity and material and labor increase in in a number of categories that's been offset by lumber save. So headline is, we're flat on a price per square foot, the build year over year, but it's a lot of increases in material and labor offset by lumber. Got it. Thanks, Ryan. Good luck, guys.
And the most recent quarter that was $107 it's up $3000.
Sequentially and year over year.
So that is still part of our sales operation. It's how we it's how we go to market.
And yes, 20% is roughly where we are.
I wouldn't expect that to change as long as market dynamics stay where they are.
Right and so I guess, what we talked about since the last quarter was options are obviously higher margin one can imply that accounting for historically that three or 400 basis point lift gross margins versus peers.
As.
That option mix can you kind of relate what is the cost.
Michael Rehaut: We will take our next question from Michael Reho with JP Morgan. Your line is open. Thanks.
Or what was the drag specifically for all these mortgage rate buy downs.
$5 75.
Mercury, 8% now like what is the net impact on your gross margins I realized as part of incentive but if you could quantify that.
Ryan Marshall: Good morning, everyone. Just wanted to take a step back and understand some of the dynamics you talk about, you know, October being choppy, but at the same time, it sounds like more in line with, you know, seasonality pre-COVID. And you also, you know, the flip side of that is, you know, with volume, you know, you're putting out a gross margin guidance for the fourth quarter, and maybe a touchdown from 3Q. You know, can we just give us a sense of, you know, the level of incentives if, you know, through your own offerings in October, or maybe even more broadly in the marketplace, have you feel like incentives have started to come up over the last couple of months because certainly, I guess, in the near term, you're looking for a similar gross margin.
And then what is the actual kind of the distribution of that it seems like an active adult paying cash doesn't need. It. So is that largely occurring in the first time buyer I heard the 80%, but I'm just trying to kind of understand that spread.
Usage relative to these options which are structurally.
Good tailwind for you and then I guess, that's one and then second your mention of finished lots very interesting because you return focused so I think the street's too focused on margins not focused enough on turns.
Did you have or what percent of closings in the quarter came from finished lots and what's kind of the margin impact of that as well I. Appreciate you answering those two sets of questions.
So Ken there's a lot there.
Ryan Marshall: And, you know, maybe just more broadly, how you feel the market is reacting to, you know, September and October. Yeah, Mike, I'll take part of that and then I'll have Bob talk about the incentive load, but, you know, it was demonstrated by our orders in the quarter. We had 43% growth in new orders and it was a number, you know, over 7,000. So, you know, I think we've clearly demonstrated that we've got the ability to sell homes.
Okay.
Let me start with that I had highlighted this before.
Our incentive load is about 6%.
$35000. So that would tell you 66, 3% something like that and again I think we've highlighted the majority of that incentive is rate buy down or financing support.
I think that's the answer to your first question.
And I apologize your second question was I think what.
Ryan Marshall: You've heard, you've heard, you know, me talk about not being margin proud, but at the same time, we're not going to give away price and incentives that we don't have to. And I think we did exactly that in the third quarter and we've continued to kind of focus on making sure that we're turning the asset and we're getting, you know, the number of absorptions that we need in every single community to deliver the best return on the best capital that we can.
What percentage of what we're talking returns right like you are a return based company, even though the street and you guys focus a lot on margin so to the extent.
The first time buyer more snack finished.
<unk> finished lots that you get better turns you guys mentioned finished lots I believe for the first time, so what is the impact.
The finished lots are you closing finished lots what type of margin impact is that.
<unk>.
Yeah, Ken it's Brian I'll jump in on that we Havent sliced the Bologna quite that then I won't attempt to do it on this call.
Ryan Marshall: So, well, I think it was a great quarter. We're happy with how, you know, sign up to perform to October. You know, you've heard me kind of talk about that on the question that Carl asked, so I won't repeat it. And then Bob, if you can, maybe just talk a little bit about the incentive load. Yeah, Mike, you know, you can see in our data, you know, we've got about a 6% incentive load that's $35,000 a unit rough bath.
Our return focused company there is no change there.
I think we've been the purveyors of the message we don't focus on margin. It's a component of the overall operating model, we're focused on return and depending on the.
The number of units that you sell on a particular community and how quickly you turn the asset.
Ryan Marshall: That actually is down 10 basis points from Q2 of this year. It is certainly not that was 2.2% last year, but, you know, the sales environment that led to the closings in Q3 of last year were dramatically different. So, you can see kind of a normalization here at 6%. I think you can take from our margin guides from Q3 that what we see closing in the fourth quarter and we've got pretty good visibility at this moment will not be significantly impactful.
If you do that fast enough that it can offset and you can allow for lower gross margins. So.
If youre if youre getting a lot just in time.
Somebody else's is developing it and carrying it.
And we can build in a kind of 100 days that were talking about it allows us to run a high returning business at a lower margin. So that's not a new concept that's exactly what we do and it is exactly what we will continue to do.
Yeah.
And as a reminder, we ask that you. Please limit yourself to one question and one follow up question and we will take our next question from John Lovallo with UBS. Your line is open.
Ryan Marshall: I would highlight, you know, we've given a continuation of that same guy at 29 to 29.5% on margins. We have told you we're going to be at the lower end of that. So there is some cost of the interest rate margin. Right. Now, appreciate that Bob. I guess secondly, maybe bigger picture conceptually, you talked about earlier in the call questions around your higher gross margin versus your peer group. When you think about the 6% today versus the 2% a year ago, and I don't know if that's 6%.
Good morning, guys. Thank you for taking my questions.
The first one is so low rates at 8% today, you guys are buying down to 575% can you just remind us last quarter when rates were I guess closer to 7%.
Love, where you were buying down too.
Yes, John we were built.
The lowest we were was five five to five.
At a national level, we had some specific markets that.
It may have been sub five at 49, nine but bay.
Ryan Marshall: I want to say it's a little bit above your longer term average, maybe around 3. How does that square with the level of gross margins you are generating today? And, you know, if you think about over the next couple of years. You know, we've heard different things from different builders about maybe increasing hurdle rates from underwriting about, you know, just thinking about how high cost land perhaps might flow through over the next couple of years.
Basically as you have seen.
The headline rate moved from seven seven and a half to eight you've seen our promotional rate move up by that same 50 basis points.
Okay and you you would anticipate probably taken that same strategy as we move forward if rates were to move up.
I think generally that's a good rule of thumb I mean, there is.
Practically speaking there is a limit how much.
Money you can throw at the rate.
Relative to what the headline number is.
Ryan Marshall: You know, if incentive levels say where they are, would that suggest kind of a moderation, a little bit from the current level of gross margins. Or how should we think conceptually about this? In the next couple of years, directionally, for this metric. Yeah, Mike, you know, our crystal ball, you know, at this point, a couple of years out, we're not there yet, you know, we're still kind of focused on Q4, we've given a guide for that quarter when we get to kind of the end of Q4 will, you know, or certainly give a full year guide for the balance of 2024.
It makes sense and then the second question is just on community count how you're thinking about that through the remainder of this year and maybe any initial thoughts as we move into next year.
Yeah, I think very consistent with what we've said, we think will be up 5% to 10% over fourth quarter of last year and then we haven't we haven't given anything for twenty-four yet John but.
As we've said in the past you can see the capital that we've spent or the land that we've spent this year.
You know a pretty good indicator of what community count will be in the future.
Okay got it thank you.
Ryan Marshall: But, you know, maybe the thing I do want to address is the incentive load that we currently have that is allowing us to offer incentives on the interest rate, that's been in our margin guide for the entire, our margin guide and our results for the entire year. So, you're seeing the impact of offering below market interest rates as an incentive, it's been in Q2 results, it's been in, it was in our Q3 results, and it's in our Q4 guide.
For what community count can turn into in the future.
Got it thank you guys.
No.
We will take our next question from Mike Dahl with RBC capital markets. Your line is open.
Yeah.
Good morning, Thanks for taking my questions.
Brian just to pick up on.
One of your last.
Responses in terms of the practical limit on how much you can grow at the rate buy down I mean, we've heard different things from different builders, depending on whether youre doing fewer kind of buy downs versus the forward purchase commitments, which I think you alluded to.
Earlier, and kind of what is and isn't considered seller contributions can you maybe elaborate a little bit more on.
Ryan Marshall: So, you know, no guidance about what margin direction will be beyond Q4 of this year. But, but that's all embedded in our, you know, to this point, everything that we've been doing, that's embedded in the results that we've delivered and the guide that we've given. Appreciate it.
Ryan Marshall: Thanks.
<unk>.
The details of how you are executing.
In the case of going down to 575.
How you're executing that is it.
Like how much is allocated towards before purchase commitment versus the pure points and do you consider the purchase commitments and the cost of that as part of your seller contributions.
Joe Ahlersmeyer: Then we will take our next question from Joe Allersmire with Deutsche Bank, your line is open. Hey, good morning everybody, thanks for taking the question. And I appreciate the data point about the active adult community in Michigan, hopefully, snow removal is included in that HOAC. Back to the show. Good. Look, market conditions, that's what's going to determine the margin volume and price in the next year. I think it's an underappreciated element of your business, of course, that the composition of that can vary, right within the definition of success, but you are obviously appropriately acknowledging the headwinds here.
Yeah, So I don't want to give away all of our.
Kind of trade secrets on that.
But suffice to say there are different rules based on who the who is.
Ultimately depending on which.
Government agencies rules youre using for that mortgage program.
For the upfront fees that we're paying on a forward commitment because those are done prior to having a home under contract those fees do not count towards solar contribution.
Joe Ahlersmeyer: Maybe if you could just talk instead to the return headwind from this instead of either the absorption headwind or the gross margin headwind, just how are you thinking about returns on capital. And then similarly returns on inventory, if interest rates remain high, you're basically at net zero debt now, just how you're thinking about ROE relative to ROI.
But.
The the.
There are additional incentives that have to be applied to the deal.
But do you have to be applied to the deal once the homes under contract those two certainly count towards the seller contribution so.
To get to 575, you got some fees on the front end you've got some fees on the backend we do look at them in the aggregate and those are the numbers that youre hearing.
Ryan Marshall: Yeah, Joe, thanks for the question, and I'll do my best to give you an answer. We've for the last decade, maybe even going on 12 years, the way that we've operated the business has been with the singular focus on delivering the best possible return on investor capital that we can, given the capital intensive nature of this business. Because we, for us, we think that's the best way to make decisions and to operationalize a operationalize our platform in a way that delivers high return on assets, high return on equity, whatever metrics you want to look at, I think we've clearly done that.
Bob talked about.
Okay. That's helpful and then.
My follow up is if we think about that movement.
And rates I don't know if you looked at it this way.
And I'll ask it in a historical context year to date you look at your year to date orders are closings.
Maybe let's focus on closings.
Have you run an analysis of how many of those buyers.
Have qualified.
At today's rates versus the rates that you were able to get them.
Year to date.
Ryan Marshall: You know, I highlighted in my prepare remarks that for the, you know, the training 12 months, we delivered return on equity over 30%. And part of that is derived from running a good business, but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes. We were paying a dividend, we've bought back, you know, near 45% of the company over the last 10 to 12 years that we've had our share buyback program in place.
No we havent run that analysis snow whatever I would highlight that no matter the rate that we're offering we qualified the buyer on the 30 year rate so.
You know a lot of the incentives that we've been doing have been 30 year fixed rate. So that is the rate we're qualifying but in the case that you do a temporary buy down.
The buyers qualified at what the permanent 30 year rate will be so.
Ryan Marshall: And we just highlighted, you know, this quarter we, we opportunistically took advantage of the opportunity to buy some debt in near term debt in that was trading below par. You know, I think the best way I can describe it, Joe, we're going to continue to focus on buying assets in great spots, turning those in a way that delivers high return on invested capital. And one of the other kind of things that I think can also continue to give us flexibility and return enhancing leverage is moving our land options to 70 percent.
I think everybody knows that but I think it's worth highlighting because you know we don't none of us want to see the industry back in the situation that we ran in 2008.
Yes.
Right Yeah.
And we'll take our next question from Alan Ratner Zelman and Associates. Your line is open.
Hey, guys. Good morning, Thanks for healthy are the input so far.
Switching gears, a little bit I guess, a what I'd like to hear your opinion on is maybe what opportunity you could potentially come about from this this recent.
Ryan Marshall: So, we said it's 53 today, we've given you kind of a long-term target of 70. You know, we've got things in place and work underway that will help us get there. Appreciate all the stops, Ryan. Yeah, and as a follow-up, just maybe on the comment around matching starts to orders. So, we interpret that as roughly 7,000 starts in the fourth quarter, or is that more of a comment on what the fourth quarter is?
I guess softening or Choppiness that Youre, describing you know your your balance sheet is obviously in fantastic shape. So is pretty much the rest of the public industry, but.
We are hearing anecdotes of a D&C capital tightening up for private operators and land developers and we're hearing built for rent deals kind of potentially falling out of favor here. So have you started to see any increase in either distressed or opportunities that you feel like you might be well take advantage of if these current conditions persist.
Ryan Marshall: That's what your starts might look like. Yeah, fourth quarter starts will be more reflective of order trends that we're seeing in the fourth quarter. You know, we're starting more spec. Then we historically have is, you know, we've highlighted that we've completely moved our first time business to a spec business. So, some of that's predetermined based on what we saw in the third quarter and what we would anticipate. But we're just not going to get into kind of a position where we've got to build up a spec inventory, you know, that creates, you know, that creates pressure to do things that are unnatural on the pricing front.
For a handful of quarters.
Yeah, Alan I think we're hearing the same things that you are particularly on maybe availability of capital or the cost of capital on the land development side.
Theres definitely I think some strain or tightness.
Tightness in that in that arena.
I think that certainly might continue.
To create an opportunity to lock the longer that we stay at a high rate environment.
I think it's also a great opportunity for us to take market share.
You know with our mortgage company the size of our balance sheet the ability to be active in the capital markets I think it gives us.
An opportunity to do things that smaller local builders and maybe private builders can so.
Ryan Marshall: But we are going to, you know, put some units in the ground to have those ready for Q1. You saw us do that last year in the back half of last year that set up for a really strong Q1 of 2023. So, you know, I want you here balanced approach inventory is going into the ground. We're going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we've acknowledged are out there in this current interest rate environment. Sounds good.
Ryan Marshall: Thanks a lot.
I think I think there's.
Certainly a market share opportunity there as well.
We've made a build to rent a small piece of our business. We've got good relationships with National partners that we are building some percentage of our annual deliveries for those operators and you know I think we've talked extensively about that that'll continue to be an arrow in our operational quicker. So.
Stephen Kim: We will pick our next question from Stephen Kim with Evercore ISI. Your line is open. Yeah, thanks very much guys. Great job. Exciting times. Ryan, in your opening remarks, you sort of talked about some of the reasons why, you know, some of the ways in which buyers seem to be responding to the rate and you sort of contrasted, or laid out that there's a psychological component, you know, maybe, you know, math versus mental.
Look I'm really really confident and pleased with the way we're operating the health of the business the volume that we're selling and kind of the core operations and then when you go to the balance sheet.
I think we're set up to.
Do a lot of great things that will continue to.
Set us up for success down the road.
That's helpful. Ryan and then I guess, just other builders have kind of put out a an absorption target that they manage their business too.
Stephen Kim: And I'm curious, and you talked about the role of buy downs in that. So, my first question relates to how you think, let's do it this way. What percent of your buyers are taking the rate buy down? And when you're negotiating these buy downs, you've talked about the 5.75 through the end of this year, it looks like, where are you setting new locks? Because I imagine you're negotiating those now for the next batch.
You know that tends to be maybe more of a spec guys entry level, where volume is certainly more of a consideration.
But I'm curious when you think about your <unk>.
Rice outlook in your margin profile and where your incentives are currently running at right.
Right now your absorption pace. This year is probably going to be in the mid twos somewhere is there a level, where if that piece dipped below that you would get much more aggressive on an incentive and discounting it even adjust base prices again.
Stephen Kim: Where are you setting those locks, you know, from a contracted rate perspective? Yeah, hey Stephen, it's Bob. It's an evergreen promise. Honestly, we are buying contracts typically weekly. Actually, and they are market based. We set the pricing on that, and that determines the price to us to offer that value to the consumers. So, the rate that Ryan talked about is a negotiated price, and essentially, you know, we fill the cost of being able to provide that contract rate to our consumer.
You know, what what would that that level look like.
Yeah, Alan it's a good question.
<unk>.
The thing that I talked about with our operators and I spent a lot of time in the field.
Our communities and our division offices talking about exactly this.
The mantra that we have inside the company as a minimum of two sales in every community.
Certainly we have certain price points and communities that sell way more than two per community, but it is a production homebuilder. It's hard to have an active store that that does less than two.
Stephen Kim: There's an upfront fee for purchasing the contract, and then there's the rate buy down as part of that. And so, it's not like we're buying now for three and six months from now. These are.., contract that we enter into that we expect to fill candidly within 30 days and typically we're filling them within a week so it's a you know it's very market responsive as rates go up it's why you've seen what we've offered has moved up a little bit you know we've increased our cost as part of that to industry so it's a it's a process we've been working through for gosh ten or eleven months now since we put it in place and we found it works pretty well so just what I'm understanding that it sounds like you what you're talking about is you have a forward purchase commitment that you're doing on a relatively short term basis but then you're also layering on top of that you know an individual rate buy down you know you know or ad hoc if you will these are these are 30 year rate buy downs for the consumer right you know the other thing that I would you know and maybe just to add your your conversation is some buyers you know they take the available incentives that we have they get them all the way to 5.75% there are other buyers that decide that they don't need to go all the way to 5.75% and they'd like to have a little bit higher rate and use some of the other incentive money that we're offering for other things that they see value in so you know we're we're seeing about 80 80 to 85% of our buyers are getting some form of incentive toward interest rates that doesn't mean everybody will go to 5.75% you know just you know some fraction of our total sales end up in that you know very lowest category you know the the big headline is that we've got the tools out there and our sales team has got the tools out there tells individually solve what each and every buyer needs to make you know the transaction work for them and maybe to put a finer point on that you know Ryan said 85% of people have an incentive program only 25% of the business in the quarter was through that national campaign that we you asked about so you know those are targeted to specific inventory units typically but we offer incentives to all of our consumers we always have and as Ryan has stated already today the vast majority of those those incentives now across all of our buyers is financing oriented yeah okay that was that was really helpful appreciate the all the nuances there my my second question relates to getting back to sort of the the seasonality and it it sounds like you but now it's a seasonality sort of coming back into the business we're as we in the fourth quarter it's a little weird right because the housing market kind of generally slows you know particularly in the last six weeks of the year and I'm curious as to your posture as you assess the buyers are you anticipating do you generally think that there's relatively more inelasticity on the part of the buyer or relatively less elasticity might be a better way of saying it so that it incentive it causes you maybe not to push so aggressively on incentive to try to keep up sales momentum in the last six weeks of the year kind of like pushing on a string is that a reasonable way to be thinking about how you're likely to approach the market over the next six weeks sorry in the last six weeks of the year and then lastly regarding a risk you would talk about wanting to evaluate all of your land your land actions in terms of risk adjusted returns but you're also running at a super low net debt to cap and I'm curious if you move to lower risk through increase incentive you know increase land banking would it be reasonable to think you'll also carry increased leverage and you currently are today Yes, Stephen, we are at a lower leverage rate than what we've historically run at.
You just you can't make the returns work to the level of our expectation. So below two per active community, that's where we start looking at a repositioned right do we have the right incentives we have the right pricing do we have the right product.
Or are we going after the right consumer Theres, a number of those levers that we pull but.
It nets out to for this quarter were two and a half.
But that's about two per community is kind of the level that we'd look at.
Yeah.
And we will take our final question from Truman Patterson with Wolfe Research. Your line is open.
Hey, good morning, everyone and Ryan the screaming Baby sale got me I I think that kids are probably in high school or college by now but.
We're going to on the way back machine trimming.
Exactly exactly no.
You all I'm trying to understand are your orders for entry level, we're performing well in the third quarter I think you set up like 53% year over year, but then.
You mentioned, some more cautious commentary about that buyer I'm, just hoping you know maybe big picture. If you could help us think through you know the monthly incentives needed for that buyer cohort versus you know you mentioned active adult maybe move up more affluent not needing quite as.
My child I'm, just hoping you can help us just kind of understand these.
These kind of bigger trends that you're seeing near term.
Yeah, Truman I look I think we're really pleased with what our first time business is doing we've invested in it.
We set our target was to get to kind of 40% of our business and we've done that and I think <unk> seen not only growth in absorptions, but growth in communities.
Business is about where we'd like to be on <unk>.
One hand that buyer doesn't have a home to sell.
They're not locked into a low interest rates that are reluctant to get rid of so I think thats the positive with that first time buyer.
In terms of the headwinds I think it's obvious it's 8% interest rates.
That's a buyer thats got a downpayment hopefully either they've saved it or that's been gifted to them by by parents.
And then theyre going to get into 30 year mortgage and they're they're they're working on what they can afford based on their wages. Good news as wages are going up.
Which is helping affordability, but.
Beyond kind of right right right.
There's probably not a bunch more that I could add in terms of kind of a first time buyer.
And maybe just last thing on the overall rate environment look high.
Hi rates aren't good for the consumer they are not good for housing they're not good for the broader economy.
But we're all kind of playing in the same environment.
And with the quality of the management team that we have.
And the way we're operating this company I think we've proven that we've got the tools and the operational flexibility to be successful in any environment. In this most recent quarter is a great example of that.
Okay, perfect and then.
Ryan you mentioned adjusting product a.
Given the higher rates I'm, hoping you could elaborate on on what all that entails for Pulte, specifically and then if I'm kind of reading between the lines.
<unk> sales were about 49% of your overall bucket this quarter.
That's a pretty good run rate.
That you all expect going forward.
Yeah, so in terms of product chairman.
One great thing about our product portfolios that we offer a lot of flexibility to scale up scale down.
We offer structural options that allow.
We are a smaller floor plan with added square footage in the form of loft or.
Additional flex space. So we've got the ability to take a base floor plan scale, it up or scale it down and we're seeing buyers use that flexibility to help address some of the affordability challenges are out there.
Stephen Kim: I think that's really more than anything. It's a testament to the strength of the business. We've been operating really well, and we have been generating a lot of cash. So a lot of money into land and land development. We've been paying our dividend. We've bought back the highest single quarter spend in shares this year in the third quarter at $300 million, and we've bought back debt. So in with that, we still grew the cash balance.
Stephen Kim: So I think it's, you know, it really demonstrates how strong the business is operating. In terms of kind of your question on kind of pricing and discounts and elasticity or in elasticity, you know, we're going to continue to do price and set incentives at a level that we think are appropriate for the market. We're going to be responsive. We're not going to be margin proud. You know, at the same time, I think we've got a good understanding of what value is.
You know in our.
The way that we sell options, we see we see buyers pick the things that they see value in but we're also seeing buyers make tradeoffs in terms of how they spend those dollars in terms of cabinets countertops upgrades et cetera.
And then.
The last last piece of your question Truman, but remind me I guess.
Your spec strategy should we kind of assume that its pretty much stable from here that you're targeting about half the business perhaps roughly.
Roughly I think Thats a good go forward run rate.
It's higher than what we experienced pre COVID-19, that's mostly reflective of the size of our first time business and entirely moving that spec.
We did highlight this quarter, 49% that's down from about 60% earlier in the year. So.
Stephen Kim: And, you know, I, you shouldn't expect to see kind of the national year and blow out red tag, kind of screaming baby sale from us. I don't, I don't think that helps the consumer. But I think, you know, you're seeing us put the appropriate incentive loads such that returning the asset, returning the inventory, we're making sure that we're getting, you know, a minimum of kind of two sales per active community, which is kind of a level that I think you need to be at in production, home building to deliver the types of return on assets, return on inventory, return on the capital that we want.
We feel pretty good about the performance spec business.
Okay.
And ladies and gentlemen that is all the time, we have for questions I will now turn the call back to Mr. Jim <unk> for closing remarks, great.
I appreciate everybody's time today, sorry, we couldn't get through to other questions certainly available over the remainder of the day for follow up.
We look forward to speaking with you next quarter.
And ladies and gentlemen. This concludes today's conference call. We thank you for your participation you may now disconnect.
Okay.
[music].
Stephen Kim: Perfect. Appreciate that. Thanks, guys.
Ken Zener: We'll take our next question from Ken Zinner with Seaport Research Partners. Your line is open. Good morning, everybody. We're good. Just want to delve into the option impact on your margin. So I think you've been saying options a bit about 19% of your ASP. Is that still where we're at in terms of, yeah, in terms of the options? Yeah, we've talked about our options and lot premiums. Being a consistent driver of value, it's part of the way we go to market.
Okay.
[music].
Ken Zener: We think it's one of the strengths of our sales process. In the most recent quarter, that was $107,000. It's up $3,000, you know, sequentially and year over year. So that is still part of our sales operation. It's how we go to market. And yeah, 20% is roughly where we are. I wouldn't expect that to change as long as market dynamics. They were there. Right. And so I guess, you know, what we talked about, you know, since last quarter was, you know, options are obviously higher margin.
Ken Zener: One could imply that's, you know, accounting for historically that three or four hundred basis point lift of gross margins versus peers. So as What is the cost of, or what was the drag specifically for all these mortgage rate buy downs? So, you know, 5.75, virtually 8% now. What is the net impact on your gross margins? I realize it's part of the set up, but if you could quantify that. And then what is the actual, this kind of the distribution of that?
Ken Zener: It seems like an active adult paying cash doesn't need it. So is that largely occurring in the first time buyer? I mean, I heard the 80%, but I'm just trying to kind of understand that spread usage, relatively these options, which are structurally a good tailwind for you. And then I guess that's one. And then second, your mention of finished lots. Very interesting because your return focused. So I think the streets two focused on margins, not focused enough on turns.
Ken Zener: Did you have, or what percent of closings in the quarter came from finished lots? And what's kind of the margin impact of that as well? I appreciate you answering those two sets of questions. All right, so Ken, there's a lot there. Let me start with that. I had highlighted this before, you know, our incentive load is about 6%. $35,000. So that would tell you 6.3% something like that. And again, I think we've highlighted the majority of that incentive is ranked by down for financing support.
Ken Zener: So I think that's the answer to your first question. And I apologize your second question. What percentage of our. Right, you were talking returns, right? Like your return based company, even though the street and you guys focus a lot on margins. So to the extent. You know, the first time buyer more spec finished lots. So you get better terms. You guys mentioned finished lots. I believe for the first time. So what is the impact that finished lots?
Ken Zener: Are you closing finished lots? What type of margin impact is that? Hey, Ken. I'll jump in on that. We haven't sliced the baloney quite that then. And I want to test to do it on this call. We are a return folks company. There is no change there. I think we've been the purveyors of the message. We don't focus on margin. It's a component of the overall operating model. We're focused on return.
Ken Zener: And depending on, you know, the number of units that you sell on a particular community and how quickly you turn the asset. If you do that fast enough, then it can offset. And you can allow for lower gross margin. So, you know, if you're, if you're getting a lot just in time and somebody else is developing it and carrying it. And we can build in the kind of 100 days that we're talking about. It allows us to run a high returning business to the lower margin. So that's not a new concept. That's exactly what we do. And it is exactly what we'll continue to do.
Ken Zener: And as a reminder, we ask that you please limit yourself to one question and one follow-up question.
John Lovallo: And we will take our next question from John Lovalo with UBS. Your line is open. Good morning, guys. Thank you for taking my questions. The first one is so rates at 8% today. You guys are buying down to 5.75%. Can you just remind us last quarter when rates for, I guess closer to 7%, you know, what level you were buying down to? Yeah, John, we were, I think the lowest we were was 5.25 at a national level.
John Lovallo: We had some specific markets that may have been sub-5 at 4.99 but basically, you know, as you've seen, the headline rate moved from 7 to 7.5 to 8. You've seen our promotional rate move up by that same 50 basis points. Okay, you would anticipate probably taking that same strategy as we move forward, if rates were to move up. I think generally that's a good rule of thumb. I mean, there is, I think practically speaking, there's a limit to how much money you can throw at the rate, you know, relative to what the headline number is.
John Lovallo: Makes sense.
John Lovallo: And then the second question is, just on community count, how you're thinking about that through the remainder of this year and maybe any initial thoughts as we move into next year. Yeah, I think very consistent what we've said would think will be up 5 to 10% over fourth quarter of last year. And then we haven't, we haven't given anything for 24 yet, John, but, you know, as we've said in the past, you can see the capital that we've spent or the land that we've spent this year, you know, pretty good indicator of what community count will be in the future. Got it. Thank you for what community count can turn into in the future. Got it.
Mike Dahl: Thank you, guys.
Mike Dahl: We will take our next question from Mike doll with RBC capital markets. Your line is open. Good morning. Thanks for taking my questions. Right. And just to pick up on one of your last responses in terms of the practical limit on how much you can throw at the rate by down. I mean, we've heard different things from different builders, depending on whether you're doing pure kind of by downs versus the forward purchase commitments, which I think you alluded to earlier and kind of what is and is considered seller contributions.
Mike Dahl: Can you maybe elaborate a little bit more on, you know, the details of how you're executing, you know, in the case of going down to 575, how you're executing that is it, like how much is allocated towards the forward purchase commitment versus the pure points and do consider the purchase commitments and the cost of that as part of your seller contributions. Yeah, so I don't want to give away all of our kind of trade secrets on that, but it is suffice to say there are different rules based on who's, you know, ultimately, depending on which government agencies rules you're using for that mortgage program for the upfront fees that we're paying on a forward commitment.
Mike Dahl: Because those are done prior to having a home under contract, those fees do not count towards seller contribution. But the, there are additional incentives that have to be applied to the deal that do have to be applied to the deal once the homes under contract those do certainly count towards seller contribution. So, you know, to get to 575, you've got some fees on the front end, you've got some fees on the back end, we do look at them in the aggregate. And those are the numbers that, you know, you're hearing Bob talk.
Mike Dahl: Okay, that's helpful.
Mike Dahl: And then my follow up is, if we think about the movement in rates, I don't know if you've looked at it this way, and I'll ask you to know historical context, you're the date. You look at your year-to-date orders or closings, maybe let's focus on closings. Have you run an analysis of how many of those buyers just wouldn't have qualified at today's rates versus the rates that you were able to get them year-to-date?
Mike Dahl: No, we haven't run that analysis. Now, you know, whatever, I would highlight that no matter the rate that we're offering, we qualify the buyer on the 30-year rate. So, you know, a lot of the incentives that we've been doing have been 30-year fixed rates. So, you know, that is the rate we're qualifying. But in the case that you do a temporary buy-down, the buyer is qualified at what the permanent 30-year rate will be.
Mike Dahl: So, you know, I think everybody knows that, but I think it's worth highlighting because, you know, we don't, none of us want to, you know, see the industry back in a situation that we were in in 2008. Great. Yeah.
Alan Ratner: And we'll take our next question from Alan Ratner, Zillman and Associates. Your line is open. Hey guys, good morning. Thanks for the info so far. Switching gears a little bit, I guess what I'd like to hear your opinion on is maybe what opportunity to potentially come about from this. This recent, I guess, softening or choppiness that you're describing, you know, your balance sheet is obviously in fantastic shape. So, it's pretty much the rest of the public industry.
Alan Ratner: But, you know, we are hearing anecdotes of AD&T capital tightening up for private operators and land developers and we're here in built for rent deals, kind of potentially falling out of favor here. So, have you started to see any increase in either distress or opportunities that you feel like. You might be able to take advantage of if these current conditions persist for a handful of quarters. Yeah, and I think we're hearing the same things that you are particularly on, you know, maybe availability of capital or the cost of capital on the land development side.
Alan Ratner: There's definitely, I think, some strain or tightness in that arena. You know, I think that certainly might continue to create an opportunity that lasts a longer that we stay in a high rate environment. I think it's also a great opportunity for us to take market share. You know, with our mortgage company, the size of our balance sheet, the ability to be active in the capital markets, I think it gives us an opportunity to do things that smaller local builders and maybe private builders can't.
Alan Ratner: So, you know, I think there's certainly a market share opportunity there as well. You know, we've made build the rent a small piece of our business. We've got good relationships with national partners that, you know, we're building some percentage of our annual deliveries for those operators. And, you know, I think we've talked extensively about that that'll continue to be an arrow in our operational quiver. So, I look, I'm really, really confident and pleased with the way we're operating, the health of the business, the volume that we're selling and kind of core operations.
Alan Ratner: And then when you go to the balance sheet, I think we're set up to do a lot of great things that will continue to, you know, set us up for six years. And then we'll access down the road. That's self-orign. And then, you know, I guess just other builders have kind of put out an absorption target that they manage their business to, you know, that tends to be maybe more of the spec guy's entry level where volume is certainly more of a consideration.
Alan Ratner: But, you know, I'm curious when you think about your price outlook and your margin profile and where your incentives are currently running at, you know, right now your absorption pace this year is probably going to be in the mid two's, somewhere, is there a level where, if that pace gets below, that you would get much more aggressive on, on incentives, discounting it even at just base prices again, you know, what would that level look like? Yeah, Alan, it's a good question.
Alan Ratner: You know, we're the thing that I talk about with our operators, and I spend a lot of time in the field in our communities, in our division offices, talking about exactly this. You know, the mantra that we have inside the company is a minimum of two sales in every community. Now, certainly we have certain price points and communities that fell way more than two per community. But as a production home builder, it's hard to have an active store that does less than two.
Alan Ratner: You just, you know, you can't make the returns work to the level of our expectation. So, you know, below two per active community, that's where we start looking at a position right. We have the right incentives, we have the right pricing, do we have the right product, you know, are we going after the right consumer? There's a number of those levers that we pull, but, you know, it nants out for this quarter, we were two and a half. But, you know, that, that two per community is kind of the level that we look at.
Truman Patterson: And we will pick our final question from Truman Patterson with Wolf Research. Your line is open.
Truman Patterson: Hey, good morning, everyone. And Ryan, the screaming baby sale got me. I think that kids probably in high school or college by now.
Truman Patterson: But, um, we're going on the way back machine, Truman. Exactly, exactly. No, you all, I'm trying to understand your orders for entry level. We're performing well in the third quarter. I think you set up like 53% year over year, but then you mentioned some more cautious commentary about that buyer. I'm just hoping, you know, maybe big picture if you could help us think through, you know, the monthly incentives needed for, you know, that buyer cohort versus, you know, you mentioned.
Truman Patterson: And active adult maybe move up more fluid, not needing quite as much. I'm just hoping you can help us just kind of understand these, these kind of bigger trends that you're seeing near term. Yeah, Truman, I look, I think we're really pleased with what our first time business is doing. We've invested in it. It's, you know, we've sent our target was to get it to kind of 40% of our business. And we've done that.
Truman Patterson: And I think you've seen not only growth and absorptions, but growth and communities and, you know, the business is about where we'd like it to be. You know, on one hand, that buyer doesn't have a home to sell. They're not locked into a low interest rate that are reluctant to get rid of. So I, you know, I think that's the positive with that first time buyer. You know, in terms of the headwinds, I think it's obvious if 8% interest rates.
Truman Patterson: And, you know, that's a buyer that's gone a down payment. Hopefully either they've saved it or they've been gifted to them by parents. And then they're going to get in the 30-year mortgage and they're, you know, they're working on what they can afford based on their wage. Good news is, wages are going up, which is helping affordability but, you know, beyond kind of rate, rate, rate, you know, there's probably not a bunch of more that I could add in terms of kind of the first time buyer.
Truman Patterson: And maybe just the last thing on the overall rate environment. Look, high rates aren't good for the consumer, they're not good for housing, they're not good for the broader economy. But we're all kind of plain in the same environment and with the quality of the management team that we have and the way that we're operating this company, I think we've proven that we've got the tools and the operational flexibility to be successful in any environment. This most recent quarter is a great example though. Okay, perfect.
Truman Patterson: And then, Ryan, you mentioned adjusting product given the higher rates. I'm hoping you could elaborate on what all that entails for, you know, Pulte specifically. And then if I'm kind of reading between the lines, spec sales were about 49% of your overall bucket this quarter, that's a pretty good run rate that you all expect going forward. Yeah, so in terms of product, Truman, you know, the one great thing about our product portfolios that we offer a lot of flexibility to scale up scale down.
Truman Patterson: You know, we offer structural options that allow a, you know, a smaller floor plan with added square footage in the form of loft or additional flex space. So, you know, we've got the ability to take a base floor plan, scale it up or scale it down and we're seeing buyers use that flexibility to help address some of the affordability challenges that are out there. You know, in our, the way that we sell options, you know, we see, we see buyers pick the things that they see value in.
Truman Patterson: And we're also seeing buyers make trade-offs in terms of how they spend those dollars in terms of cabinets, countertops, upgrades, etc. And then the last piece of your question, Truman, I remind me again, your spec strategy, should we kind of assume that it's pretty much stable from here that you're targeting about half the business, perhaps. Yeah, roughly. I think that's a good go for run rate. You know, it's higher than what we experienced pre-COVID.
Truman Patterson: That's mostly reflective of the size of our first time business and entirely moving that spec. You know, we did highlight this quarter, 49% that's down from about 60% earlier in the year. So, you know, we feel pretty good about the performance of the spec business.
Jim Zumer: And ladies and gentlemen, that is all the time we have for questions. I will now turn the call back to Mr. Jim Zumer for closing remarks. We appreciate everybody's time today. Sorry, we couldn't get through to all the questions, but certainly available over the remainder of the day to follow up. And we'll look forward to speaking with you next quarter.
Jim Zumer: And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect Thank you very much.