Q3 2023 Meritage Homes Corp Earnings Call

Greetings and welcome to the Meritage homes third quarter 2023 analysts call.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host heavily to Donald Vice President of Investor Relations and ESG. Thank you you may begin.

Thank you operator.

Morning, and welcome to our analyst call to discuss our third quarter 2023 results.

The press release yesterday after the market close you can find it along with the slides we'll refer to during this call on our website at investors that meritage homes dot com or by selecting the Investor Relations link at the bottom of our homepage.

Please refer to slide two crushing you that our statements during this call as well as in the earnings release and accompanying slides contain forward looking statements.

And any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.

Any forward looking statements are inherently uncertain are actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with Securities and Exchange Commission, specifically, our 2022.

He will report on Form 10-K, and our most recent 10-Q, which contain a more detailed discussion of those risks.

We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures.

With us today to discuss our results are Steve Filton Executive Chairman Phillipe, Lord CEO and he left peruse, our executive Vice President and CFO of Meritage homes, We expect today's call to last about an hour a replay will be available on our website within approximately two hours. After we conclude the call and will remain active there in November.

14, I'll now turn it over to Mr. Hilton Steve Thank.

Thank you Emily welcome to everyone listening on the call I'll start by touching on what we're experiencing in the market today in recent company achievements sleep will cover our operational performance hurdle will provide a financial overview of the third quarter and forward looking guidance.

The whole buy environment. This quarter was impacted by the same overarching macroeconomic factors, we've been experiencing since mid 2022.

Mortgage rates remain elevated and have now increased nearly 8%.

Meanwhile, millennials and baby Boomers are still collectively have any life events. The great need based housing demand, but they are finding limited inventory due to the chronic shortage of existing home listings in the market as current homeowners are wary of leave when they are below market mortgages.

With this backdrop homebuyer demand held steady in the third quarter of 2023, as we used financing incentives to help customers solve for monthly payment.

Our selection available spec homes.

Our third quarter 2023 sales orders increased 50% over last year's third quarter, and we achieved an Arab absorption pace of 4.1 per month.

Further we achieved a record backlog conversion of 96% generate our highest third quarter closings of 3638 homes and home closing revenue of $1 6 billion.

Home closing gross margin for the quarter was 26, 7%, which combined with the SCA of 10, 1% led to diluted EPS of $5.98.

Now onto slide four for our recent milestones.

During the quarter, we announced our entry into Jacksonville, Florida.

Long and successful history throughout Florida Division throughout our Florida divisions, and with several recent land acquisitions, we're excited to start to generate closings of Jacksonville later in 2024.

As a result of our strong workplace culture and employee engagement marriage became certified as a great place to work. This quarter, we were humbled to be added to the prestigious group of companies with this designation.

We're also proud of the continued acknowledgment of our corporate citizenship.

As it relates to sustainability, we received the EPA is 2023 indoor Air Plus award for the third consecutive year for building healthy homes enjoying green builder media 2023 Eco leaders less we also earned two honors in our headquarters hometown.

Social initiatives by making Arizona, most admired companies for 2023 list and being named one of the 2023, Arizona business Angels honorees.

In August we published our 2022 ESG report with dealers.

Yes T C F D task force on climate related financial disclosure data.

We have progressed, along our ESG journey and encourage the investor community to learn more about our stakeholder engagement national vendor survey, an expanded UN sustainable development goals detailed in that report and with that I'll now turn it over to Felipe.

Thank you Steve.

When looking at the current market dynamics, we believe Meritage has two distinct competitive advantages.

First we built back and provide affordable move in ready inventory. So we are offering the most desired criteria in homebuilding today.

Second as a large public builder with long term mortgage financing relationships, we were able to access interest rate locks and rate buy downs that today's customers and searching for to ease the impact of higher monthly payments, we're providing our local teams with a full toolkit of available financing solution that can that can be customized to each potential home.

<unk> needs, allowing us to merge the benefits of being a top five builder with the personal service and agility that are required to sell homes in today's markets.

Existing home sellers cannot replicate the financing incentive and even smaller private builders and we struggled to do so consumers reacted positively to our incentives this quarter, resulting in an average absorption pace of $4. One in Q3 slightly above our target range, even in a tough rising rate environment.

We also benefited from the further loosening of the supply chain and the stabilization of labor this quarter, which helps shorten our construction schedule. Another 15 days from Q2 to Q3 or accumulative reduction of over 50 days so far this year.

This improvement brings us closer to our internal target of turning our inventory three times a year, if you're driving increased cash flow.

Cycle times were 140 days in Q3.

Our operational improvements and careful attention to local market needs resulted in this quarter stronger sales pace incremental closings and a backlog conversion nearing 100% significantly exceeding our goal of the high age.

Now turning to slide five.

Our sales orders for the third quarter were 3474 homes with 88% of the volume coming from entry level homes orders were up 50% year over year due to a stable housing environment and a cancellation rate of 11% this quarter, which was below our historical average in the mid teens.

As a reminder, last year, our cancellation rate spiked to 30% in Q3, when the rapid rise in mortgage rates impacted buyer psychology.

Going forward, we expect Q4 do you have a similar year over year dynamic as Q3.

ASP on orders this quarter of 430000 was up 2% from prior year due to geographic mix. The third quarter of 2023 average resorts and pace of $4 one per month improved from $2 seven in the prior year.

We believe Q4 demand will remain steady, although we do see traditional seasonal seasonal pattern, returning and ongoing concerns regarding interest rate volatility. So we plan to carefully monitor our available finance see incentives and adjust as needed in order to maintain our sales pace at our targets.

In the third quarter of 2023.

Community Count acuity was 3% below prior year and down one down 1% sequentially compared to the second quarter of 2023, either resolved early community closeout closeouts due to the strength of demand in the market.

We opened 20, new communities quarter I remain focused on our commitment to get back to growing our community count in 'twenty 'twenty four as we acquire additional land and work to develop our existing whammy inventory, we still anticipate further choppiness over the next few quarters, but expect the general community count trying to increase too and beyond our 300 community target over the next year or so.

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Slide six moving to regional level trends, our strategy at a pace over price led to improvement in our sales pace in the third quarter across all geographies, both year over year and sequentially from Q2 to Q3.

The Central region had the highest regional bridge absorption pace of $4 five per month compared to $2 seven last year.

Job growth and in migration environment in Texas, coupled with our steady spec production enabled our central read it to convert over 100% of its backlog this quarter.

With the highest regional completed spec inventory at the end of the quarter. We believe this region is well positioned to maintain strong sales base.

The East region had an average absorption pace of $4 three per month this quarter compared to three eight in prior year capitalizing on stable market condition condition as average community count held steady.

With some of the tightest home inventory in certain markets. The cancellation rate in this region was in single digits this quarter well below well below our historical averages looking at October results demand is still solid in these markets the.

The West region had an average absorption pace of $3 six per month compared to one point by per month for the same period in 2019.

Benefiting from improved buyer psychology, and the cancellation rate in line with company average this quarter.

The 116% improvement in order volume in the region, coupled with their highest fees drove the consolidated level mix shifts and resulted in an increase in order ASP this quarter.

Conditions in select markets like Denver, and Houston continue to be some of those challenging the country, resulting in a lower monthly page as we continue to work through the right combination of financing financing incentives in these markets.

Now turning to slide seven.

During the third quarter of 2023, our closings of 3630 homes, where 4% greater than prior year due to a shortened cycle times and the commitment to our spec building strategy with over a third of the homes. We closed this quarter also fold intra quarter, we achieved a record backlog conversion rate of 96%, which compared to 48% last year.

We believe we can maintain the 80% plus targeted conversion rate consistently with the normalization of construction timelines.

Given the steady strength of the housing market our quarterly starts of approximately 4000 homes in the third quarter was up 47% from about 2700 in the prior year and remained in line to start cadence in Q2 this year.

We ramped up or down or starts per community as necessary to align with our sales pace looking to Q4, we expect to replenish our spec inventory by starting around 4000 homes to ensure sufficient move in ready inventory for the 2020 for spring selling season.

We ended the third quarter with approximately 4900 spec homes in inventory, which was up 10% sequentially from nearly 4000 Byron's backs in second quarter. This represented 18 specs per community quarter, which equates to $4 four months supply of specs on the ground. This is in line with our optimal level of four to six months of supply.

All of our home closings this quarter, 89% came from previously started inventory up from 75% in the prior year, 16% in Palm specs were completed at September 30.

While we target on a run rate for completed specs are about one third and given sustained high demand for complete inventory, we're still working to meet this goal alright.

Our ending backlog at September 32023 totaled approximately 3600 homes down from about 6100 in the prior year and slightly down from nearly 3800 at June 32023.

I'll now turn it over to Hela to walk through additional analysis of our financial results.

Thank you Felipe, let's turn to slide eight and cover our Q3 financial results in more detail home closing revenue increased 3% from $1 6 billion in the third quarter of 2023, driven by 4% Greater home closing volume, which was partially offset by a 2% decrease in asps due to more constant financing.

Home closing gross margin decreased 200 bps to 26, 7% in the third quarter of 2023 through 28, 7% in the prior year from the same financing incentives, it's rates hovering around 8%, our continuing commitment to purchasing rate buy downs and other financing incentives is more costly.

It won't be European for similar financial solutions in 2022. This quarter's 26, 7% gross margin increased 230 bps sequentially from Q2 benefiting from cycle time reductions and greater leverage of fixed costs. Although our teams are continuing to pursue rebates and orange constant negotiations.

With our national trades, our total direct costs held steady this quarter is the acceleration in industry starts since January is that little excess capacity in the homebuilding supply chain outside of lumber costs related to all other building materials and supplies are still higher than historical norms and our direct cost savings are primarily.

Arrived from improvements in production times, we believe our target gross margins of 22% plus remains achievable. Although we do expect today still elevated margins could be potentially impacted in future periods by continuing financing incentives anthem.

Starting to come through our financials from record high land development costs incurred over the last couple of years. Since we know it's front of everyone's mind I wanted to quickly touch on our customers' credit metrics and what we're seeing in our mortgage operations over the last several quarters, even with 80% to 85% of our buyers receiving some sort of financing.

Our qualified buyer profile remained consistent with our historical averages with FICO 740, DTI is around 41 to 42 and Ltvs in the mid Eighty's. Since March of 2022, we have been offering some combination of rate locks and rate buy down assistant like our current 587.

5% 30 year fixed rate lock. However, these rate locks were utilized by less than 20% of our closings in Q3, Although Houston has picked up a day in our Q4 backlog the rest of our customers are using other forms of less expensive financing incentives from three to one for Q1 buy downs arms.

Traditional rate locks or rate buy downs that are not part of our larger forward commitment.

Expect utilization of financing incentives to remain elevated.

And likely more costly at least for the short term short term.

Certainty around future interest rates, it's still driving a desire for rate locks.

In the third quarter of 2023 was 10, 1% compared to eight 1% in the third quarter of 2020 to higher commissions comprised about 130 beds for the change with the balance primarily relating to higher employee count mostly within our startup market as well as the wage growth pressures with.

Our increased specs, we also had higher expenses quarter associated with maintaining this larger volume of inventory. We are actively working to reduce our SG&A leverage and expect long term averages to be in the high single digits in the third quarter of 2023, we recognized a loss on the early extinguishment of debt of $900000 in connection.

With the 159 partial redemption of our 6% senior notes due 2025, there were no debt redemptions in 2022 for.

Our third quarter effective income tax rate was 22, 4% compared to 23% in 2022.

So the 2023 rate benefitted from the energy tax credits at the higher $2500 per home level and in fact this year nine months of energy tax credits were recognized last year in Q3, when the new energy tax outlays retroactively approved.

Overall, the lower gross margin greater overhead costs and a higher tax rate, partially offset by increased home closing revenue led to a 16% year over year decline in the third quarter 2023 diluted EPS to $5.98. This performance resulted in a book value per share of $121 in 'twenty.

Nine cents up 20% year over year, and our return on equity of 18, 1%.

To highlight a few items from the September 32023 year to date results compared to 2022 orders were up 4% closings were at 5% our home closing revenue increased 5% to four 4 billion. We had a 540 bps decline in home closing gross margin to 24 point.

7%, primarily due to more costly financing incentive SG&A as a percentage of home closing revenue was 10.1% from higher commissions compensation and technology expense and net earnings declined 26% to $539 $9 million.

As we turn to slide nine.

We wanted to share a follow up to last quarter's upgrade by S&P Fitch should also just elevated as investment grade with a triple B minus rating. We appreciate the Q reading agencies have recognized our disciplined approach to balance sheet management, even as we pursue a comprehensive plan and it encompasses both growth in the business and returning capital to.

As shareholders, we were very active this quarter in our capital spend activities to be pronged approach first we accelerated our investment in internal growth this quarter with $537 million spent on land acquisition and development, which was about 41% from prior year and up 31% sequentially.

On a year to date basis, we spent $1 3 billion and we expect full year 2023 land spend to total north of our prior expectation of one 5 billion as we replenish our land portfolio. After a short hiatus from land acquisition that started in the latter half of 2022.

As for the next year and onwards, we plan to spend $2 billion plus in land acquisition and development as we look to grow our community count 10% to 15% on an annual basis.

We also prioritize returning cash to shareholders by repurchasing over 300019 shares of common stock for $45 million. This quarter. This brings our year to date 2000, twenty's respond to $55 million buying back about 413000 shares of stock or one 1% of shares outstanding at the beginning of the year.

Over $189 million remained available under our authorization program as of September 32023, and will continue to be opportunistic with our share repurchases. This.

This quarter. We also spent $9 8 million on our quarterly cash dividend payment of 27 cents per share. It is our intent to reset the dividend amount in the first quarter and each year.

Lastly, we redeemed $150 million of our 6% senior notes due 2025, using our excess cash this quarter.

$250 million remained outstanding under the notes as of September 32023.

Even given all of our internal and external capital uses we continue to generate positive cash flows maintained ample liquidity and a flexible balance sheets and remain below our net debt to cap ceiling at the high Twenty's percent, we had nothing drawn on our credit facility cash of a billion dollars and negative net debt to cap of 1% at September 32020.

Streets, as well as generated $460 million in operating cash flows and 187 million and total cash flows. So far this year in the last five to seven years, we have been disciplined and reinvesting back in our company and repurchasing equity. This year, we also implemented implemented paying quarterly cash dividends.

It's our intent to continue pyrite tightening both growth in business and returning cash to shareholders and we have structured our capital plan to do so on to slide 10.

Picked up momentum on land deals in Q3 by putting approximately 5000 net new lots under control compared to about 2800 in Q2, we owned or controlled a total of about 60700 lots at quarter end slightly higher than when we started the quarter. This equated to $4 two year supply of lots at September 32023.

Which compared to about 66300 lots or 5.1 year supply of lots at September 32022, the new large added this quarter represent 37 future communities ultra entry level product.

Also have almost 30000 additional lots, where we're still undergoing due diligence that were actively pursuing all.

Our ability to source land that meets our return hurdles has not been impeded by this flurry of risk recent land acquisition activity landed always competitive, but we have been successful in finding dirt that underwrites to afford us per month pace and our IRR and gross margin hurdles, assuming today's current asps and direct costs about <unk>.

74% of our total lot inventory at September 32023 was owned and 26% with options and the prior year, we had a 69% owned inventory and a 31% option lot position, while we're always looking for ways to carry our land book, we don't artificially create a financing vehicle to target a specific person.

Operator: Greetings and welcome to the Meritage Homes 3rd Quarter 2023 Analyst Call At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Vantage of option land is land bank when it makes sense for a specific deal otherwise even able to fund our growth through retained earnings our balance sheet is in good shape, especially in light of the recent upgrade to investment grade and we look to leverage this cheaper capital while we haven't been an active player in the land banking markets recently as we look.

Emily Tadano: It is not my pleasure to introduce your host, Emily Tadano, vice president of Inverse Relations, and ESG. Thank you. You may begin. Thank you operator. Good morning and welcome to our Analyst Call to discuss our 3rd quarter 2023 results. We issued the press release yesterday after the market closed. You can find it along with the slides. We'll refer to during this call on our website at investors.meritagehomes.com or by selecting the investor relations link at the bottom of our homepage.

To grow our land position and we see market conditions stabilizing we do intend to utilize land banking more frequently in the near future.

I'll direct you decided aladdin for our guidance our spec strategy combined with cycle times that it started to normalize give us visibility into the next quarters potential closing universe based on our over 3600 units in backlog and another approximate 4900 stacks in the ground today for Q4 2023, we are projecting total closing.

Emily Tadano: Please refer to slide 2. You're cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide.

<unk> to be between 3500 3700 units home closing revenue of $1 45 to 1.53 billion.

I'm closing gross margin of 25% to 26% an effective tax rate of about 23% and diluted EPS in the range of $4.84 to $5 and 43 sites.

Emily Tadano: As well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2022 annual report on form 10K and our most recent 10Q, which contain a more detailed discussion of those risks. We have also provided a reconciliation of certain non-gap financial measures referred to in our press release as compared to their closest related gap measures.

We expect to provide 2024 guidance next quarter, we do anticipate an acceleration in our clothing unit in the mid to high single digits next year with that I'll turn it back over to Felipe. Thank you hilla to.

To summarize on slide 12 in the third quarter of 2023, we focused on paid by offering financing incentives and achieved an average absorption pace just above our internal goal.

Emily Tadano: With us today to discuss our results are Steve Hilton, Executive Chairman, Philippe Lord, CEO, and he lists for you the Executive Vice President and CFO of Meredith Homes. We expect today's call to last about an hour. A replay will be available on our website within approximately two hours after we conclude the call and will remain active through November 14th.

We believe housing market demand will remain steady in the near future. Although is the turn of normal seasonality and some near term volatility from interest rate concerns. We will continue adjusting our suite of financing incentives in order to maintain our sales pace target.

With higher order volumes, we gain the operational efficiencies and improved leverage of fixed costs to drive better financial results. We.

We believe in our proven business model of priests already 100% of our entry level homes. We are replenishing our move in ready inventory with approximately 4000 starts a quarter to align with our sales pace and to meet the anticipated Q4, and 2020 for spring selling season demand.

Steve Hilton: I'll now turn it over to Mr. Hilton.

Steve Hilton: Steve? Thank you, Emily. Welcome to everyone listening on our call.

Steve Hilton: I'll start by touching on what we're experiencing in the market today and recent company achievements. People cover our operational performance.

With normalizing cycle times, we can deliver homes faster and turn our inventory three times a year, even with the Choppiness in our community count over the next several quarters. We believe we can deliver 13525 to 13725 homes this year and drive sustainable long term growth.

Steve Hilton: He will provide a financial overview of the third quarter and forward looking guidance. But home by environment, this quarter was impacted by the same overarching macroeconomic factors that we've been experiencing since mid-2022. Mortgage rates remain elevated and have now increased to nearly 8%. Meanwhile, millennials and Bayoomers are still collectively having life events that create need-based housing demand, but they're finding limited inventory through the chronic shortage of existing homelessness in the market as current homeowners are wary of leaving their below market mortgages.

With that I will now turn the call over to the operator for instructions on the Q&A operator.

Thank you and we'll now conduct our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line. It in the question queue.

Steve Hilton: With this backdrop, home by demand helps steady in the third quarter of 2023, as we used financing incentives to help customers solve for monthly payment for our selection of available back homes. Our third quarter of 2023 sales orders increased 50% over last year's third quarter and we achieved an hour of absorption pace of 4.1 per month. Further, we achieved a record backlog conversion of 96% to generate our highest third quarter of closings of 3,638 homes and home closings in revenue of 1.6 billion. Home closings rose larger for the quarter with 26.7% which combined with the SGA of 10.1% led to diluted EPS of $5.98.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Truman Patterson with Wolfe Research. Please state your question.

Hey, good morning, everyone. Thanks for taking my questions first just wanted a little bit of clarity on the fourth quarter closings a S. P guidance down about 6% sequentially just checking to see if that's primarily geographical mix shift maybe a little.

More incentives just seeing if you can provide some color on that.

Yes, Thanks, Julian Felipe, it's mostly geographical we're expecting quite a bit of closings coming in from Texas, where we've seen really strong demand in some of the better cycle time, So a lot of it's geographical.

Steve Hilton: Now on to slide 4 for our recent milestones. During the quarter, we announced our entry in the Jacksonville, Florida, in our longest successful history throughout Florida divisions and with several recent land acquisitions, we're excited to start to generate closings in Jacksonville later in 2024. As a result of our strong workplace culture and employee engagement, marriage became certified as a great place to work this quarter. We were humbled to be added to the procedures group of companies with this designation.

The incentives we have are in the gross margin guidance. There is it's not a lot of incremental incentives in Q3 that are playing out in Q4, So it's mostly mix.

Okay. Gotcha is so clearly that would imply perhaps a bit of a deceleration in orders out west and Felipe I think he mentioned Denver.

Steve Hilton: We were also proud of the continuing acknowledgement of our corporate citizenship. As it relates to sustainability, we received the EPA's 2022 Indoor Air Plus Award for the third consecutive year for building healthy homes and joining GreenBuilder Media's 2023 Eco Leaders List. We also earned two honors in our headquarters hometown for our social initiatives by making Arizona most admired companies of 2023 list and being named one of the 2023 Arizona Business Angels honorees.

And Tucson being a little more pressured I'm just trying to understand given the recent rate move if you could kind of go through the markets of the west and give a little bit more color there.

Yeah, I mean, as we said in our opening comments the west is still the part of our geographical footprint, that's not contributing north of four net sales per month.

I think we're seeing stronger performance in southern California, and generally in Phoenix, but Tucson in Colorado.

Or a little bit of a drag where prices got.

Steve Hilton: In August, we published our 2022 ESG report with the enhanced TCFD task force on climate-related financial disclosure data. We have progressed along our ESG journey and encouraged the investor community to learn more about our stakeholder engagement, national vendor survey, and expanded UN sustainable development goals, detailed in that report.

Really stretched over the last few years and with the rising interest rates, we see the affordability pressure.

But everyone's doing over three most of them are doing three and a half.

We're trying different things in those markets.

Your capture the demand, but it's you know.

The west versus taxes versus the south.

Is where we're seeing the the largest issues with the right rate volatility in acquiring customers.

Phillippe Lord: And with that, I'll now turn it over to Philippe. Thank you, Steve. When looking at the current market dynamics, we believe Meredith has two distinct competitive advantages. First, we build specs and provide affordable moving ready inventory so we are offering the most desired criteria in home building today. Second, as a large public builder with long-term mortgage financing relationships, we are able to access interest rate locks and rate buy-downs that today's customers is searching for to yield the impact of higher monthly payments.

Okay perfect. Thank you all.

Thank you.

Our next question comes from Stephen Kim with Evercore ISI. Please state your question.

Yeah. Thanks, a lot guys I appreciate all the color, particularly some of the longer term commentary you know like community count growth and stuff that was and margins that's helpful.

My question. My first question relates to I think you referred to normal seasonality potentially returning in for Q.

Phillippe Lord: We are providing our local teams with a full-tool kit of available financing solutions that can be customized to each potential home buyers needs, allowing us to merge the benefits of being a top-by-builder with the personal service and agility that are required to sell homes in today's markets. Existing home sellers cannot replicate the financing incentive and even smaller private builders in the struggle to do so. Consumers reacted positively to our incentives this quarter, resulting in an average absorption pace of 4.1 in Q3, slightly above our target range, even in a tough rising rate environment.

I was just wondering if you could be a little more specific on how you think about absorption. So what does that kind of normal seasonality as you move from three Q4, Q and then sort of as well I'm curious about following up on our incentive comment you made was curious if you could tell us what was it.

The average rate that your customers that used your finance company what is the average rate that they actually you know got.

Phillippe Lord: We also benefited from the further loosening of the supply chain and the stabilization of labor this quarter, which helps shorten our construction schedule another 15 days from Q2 to Q3 or a cumulative reduction of over 50 days so far this year. This improvement brings us closer to our internal target of turning our inventory three times a year and to driving increased cash flow. Our cycle times were 140 days in Q3. Our operational improvements are and careful attention to local market needs resulted in this quarter's stronger sales pace, incremental closings and a backlog conversion nearing 100%, significantly exceeding our goal of the high 80s.

And what would you say it is now on the orders, you're seeing coming in and and <unk>.

Yeah, I'll, let <unk> answer the second part.

The first thing I would say it.

October where we're kind of through October here and it feels a lot like what we just experienced in September so.

It's still hard to say what normal seasonality is going to look like I mean, when we think about seasonality long term Steven we feel like we're going to sell.

We have four to five net sales.

Kind of February through June four sales you know July through September October and then you know maybe three to three and a half sales.

Phillippe Lord: Now turning to slide five, our sales orders for the third quarter were 3,474 homes with 88% of the volume coming from entry-level homes. Orders were up 50% year over year due to a stable housing environment, and a cancellation rate of 11% is quarter, which was below our historical average in the mid-teens. As a reminder, last year our cancellation rate spiked to 30% in Q3 when the rapid rise in mortgage rates impacted buyers' psychology.

October through January when the holidays are that's traditionally how our business has worked as long as I've been in it.

It hasn't worked exactly that way the last four years, but that's how we generally think of our business when there's normal seasonality I'm not saying, we're experiencing that today, but we expect over time that will revert back to that and then when you average that all out that four to four and a half net sales per month. So that's how we think about it.

Phillippe Lord: Going forward, we expect Q4 to have a similar year over year dynamic as Q3. ASP on orders is quarter of 430,000 was up 2% from prior year due to geographic mix. The third quarter of 2023 average absorption pace of 4.1% per month improved from 2.7% in the prior year. We believe Q4 demand will remain steady, although we do see traditional seasonal patterns returning and ongoing concerns regarding industry volatility. So we plan to carefully monitor our available finance, see incentives, and adjust as needed in order to maintain our sales pace on our targets.

Long term and then I'll, let <unk> answer that.

That question sure so the incentive question.

If you think about it we've always had kind of around 80 ish percent capture rate in our AR.

And our mortgage company, it's a little higher than that obviously, because we're offering the incentives that were hot or having a higher take rate. So we're kind of mid eighties.

Of that of that buyer pool, which is the majority of our buyers. Our Q3 numbers are right around 6% all in we're seeing maybe about 25 bips higher than that right now as to what's going to get closed out here or scheduled to get closed out here in Q4. So there is a slight increase although not material.

Phillippe Lord: In the third quarter of 2023, our average community count of 2.2% was 3% below prior year, and down 1% sequentially compared to the second quarter of 2023 as a result of early community cloning out closeouts due to the strength of demand in the market. We open 20 new communities quarter and remain focused on our commitment to get back to growing our community count in 2024 as we acquire additional land and work to develop our existing land inventory.

And those rates are significantly below the 8% that we're seeing in the marketplace.

Yeah, No doubt that's yeah. That's super helpful really are encouraging as well second question I had for you in light of the such a burnout case that just are you know the jury took all up like two seconds to think about it it seems like we might be seeing buyer commissions coming down in the.

Phillippe Lord: We still anticipate further choppiness over the next few quarters, but expect a general community count trend to increase to and beyond our 300 community target over the next year or so. Slide 6, moving to regional level trends. Our strategy of pace of our price led to improvement our sales pace in the third quarter across all geographies, both the over year and sequentially from Q2 to Q3. The central region had the highest regional average absorption pace of 4.5 per month compared to 2.7 last year.

And the next few years I was curious if you could remind us.

What you're you're what commissions represent as a percentage of your home sales our revenue right now I know that you said that it was a.

130 basis point of the year over year change, but what is the actual level at this point on.

Percentage of revenues.

Phillippe Lord: The job growth and immigration environment in Texas coupled with our steady spec production enabled our central region to give over 100% of its backlog of this quarter. With the highest regional completed spec inventory at the end of the quarter, we believe this region's well positioned to maintain a strong sales pace. The East region had an average absorption pace of 4.3 per month this quarter compared to 3.8 in prior year, capitalizing on stable market condition, conditions as average community count held steady.

So obviously traditionally it's about 3% in today's market that says this is a marketing tool. This is a selling tool for us. So most markets are at three some markets, particularly in Texas, and maybe a little bit north of that for the China to touch five by Oh, It's a market by market sometime community by community decision and then.

Our participation rate is running about three quarters at somewhere between 70 and 75%.

Phillippe Lord: With some of the tightest home inventory in certain markets, the cancellation rate in this region was in the single digit this quarter, well below our historical average. Looking at October results demand is still solid in these markets. The West region had an average absorption pace of 3.6 per month compared to 1.5 per month in same period in 2022. Benefiting from improved buyer psychology and a cancellation rate in line with company advances quarter.

Our homes are sold.

With the co broke.

Okay. So what was the actual rate, though that 130 basis point year over year change like what was the actual number within SG&A.

I don't think we're going to get into that level of that level of detail back and definitely state any 2022.

We were running very low 1% to 2% is probably what we were paying in commissions at the time and now I would say, we're probably around three.

Phillippe Lord: The 160% improvement in order volume in the region coupled with their highest fees drove the consolidated level shift and resulted in the increase in order ASPs of quarter. Market conditions and selecting markets like Denver and Tucson continue to be some of the most challenging the country, resulting in a lower monthly pace as we continue to work through the right combination of financing and financing incentives in these markets. Now turning to slide seven.

3%.

Okay. Thanks, very much guys.

Thank you.

Our next question comes from Michael Rehaut with J P. Morgan. Please go ahead.

Alright, thanks, and good morning, everyone.

I appreciate the.

Kind of forward look on 24 talking about closings up mid to high single digits.

Phillippe Lord: During the third quarter of 2023, our closings of 3,630 homes were 4% greater than prior year due to a shortened cycle time and the commitment to our spec building strategy. With over a third of the homes we closed this quarter, also sold interquarter, we achieved a record backlog conversion rate of 96%, which compared to 48% last year. We believe we can maintain the 80% plus targeting conversion rate consistently with the normalization of construction timelines.

I was curious if you could kind of give us a sense of.

That growth is expected to be predominantly driven by community count.

And you know I.

I don't know if you kind of gave an update I apologize if I missed it.

Where you expect community count to finish out this year.

Yeah, we didn't give out any guidance for this year as we said in our comments, we think it's going to be choppy here for the next quarter, but we also said that we do expect community count growth into the back half of next year in 2025.

Phillippe Lord: Given the steady strength of the housing market, our quarterly starts of approximately 4,000 homes in the third quarter was up 47% from about 2,700 in the prior year and remained in line with the start cadence in Q2 this year. We ramped up or down our starts per community as necessary to align with our sales pace. Looking to Q4, we expect to replenish our spec imagery by starting around 4,000 homes to ensure sufficient movement ready inventory for the 2024 spring selling season.

So we're not expecting that our absorption rates per store are generally going to increase from where they're at we're hitting our four four target. So I guess.

Therein lies the answer right its community count growth.

Throughout 2020 for mostly in the back half of next year.

Phillippe Lord: We ended the third quarter with approximately 4,900 spec homes in inventory, which is up 10% sequentially from nearly 4,500 spec in second quarter. This represented 18 spec per community's quarter, which equates to 4.4 months supply of specs on the ground. This is in line with our optimal level of 4 to 6 months of supply. Of our home closings, this quarter, 89% came from previously started inventory, up from 75% in the prior year. 16% of total specs were completed at September 30. While we target our run rate for complete specs of about 1.3 and given sustained high demand for completed inventory, we are still working to meet this goal.

Okay, Great no I appreciate definitely.

I guess secondly, just to clarify on.

The answer before talking around.

And.

Around.

How that's impacting our current gross margins.

No.

Yes.

For Q gross margin guidance, given obviously your spec model N.

The.

More rapid reflection of current market conditions in your and your numbers sooner than later all else equal.

Is it fair to say that the gross margins guidance for for Q <unk>.

Phillippe Lord: Our ending backlog at September 30, 2023 tolls are approximately 3,600 homes down from about 6,100 in the prior year and slightly down from nearly 3,800 at June 30, 2023.

Largely reflects the more recent changes in incentives and perhaps hiring.

More expensive.

Hilla Sferruzza: I will now turn it over to Hila to walk through additional analysis of our financial results. Hila? Thank you, Hila. Let's turn to slide 8 and cover Q3 financial results in more detail. Home closing revenue increased 3% to 1.6 billion in the third quarter of 2023 driven by 4% greater home closing volume, which was partially offset by 2% decrease in ASP due to more than 2.7% in the third quarter of 2023 from 28.7% in the prior year from these same financing incentives.

Rate buy downs that that's.

Yeah, I think the industry is kind of absorbing at this point.

Yeah, that's a 100% fair I mean, it's it's 100% accurate right our fourth quarter guidance. Most of those sold are most of those homes are sold.

Block those folks in at the rate that we need to to get them.

Through the homeowner homeownership journey. So it's captured in our fourth quarter guide what we're what we're utilizing.

To acquire those customers.

Yeah.

Great. Thanks, so much good luck.

Yes. Thank you.

Hilla Sferruzza: This rate covering around 8% are continuing commitment to purchasing rate buy downs and other financing incentives is more costly than what we were paying for similar financial solutions in 2022. This quarter's 26.7% gross margin increased 230 vip sequentially from Q2, benefiting from cycle time reductions in greater leverage of fixed costs. Although our teams are continuing to pursue rebits and are in constant negotiations with our national trades, our total direct costs held steady this quarter is the acceleration in industry starts since January has left little excess capacity in the home building supply chain.

Thank you. Our next question comes from John Lovallo with UBS. Please state your question.

Hey, guys. Thank you for taking my questions as well.

On the on the cost side I think he mentioned relatively stable year over year costs in the third quarter can you just help us maybe break this out a little bit between what you saw for land labor and materials, where they all sort of similar on a year over year basis or were there some offsets within that group.

Yeah.

So I would say you're talking about year over year.

Yes.

Yeah. So I'd say, we've we've obviously shared what our direct costs have done year over year. Most of that's been lumber, but there are some offsets in other places so it's relatively stable.

Hilla Sferruzza: Outside of lumber, cost related to all other building materials and supplies are still higher than historical norms and our direct cost savings are primarily derived from improvements in production times. We believe our target of gross margins of 22% plus remains achievable, although we do expect today's still elevated margins to be potentially impacted in future periods by continuing financing incentives and some higher top costs starting to come through our financials from record high land development costs incurred over the last couple of years.

Labor has been also stable for the most part, but certainly higher land costs are flowing through as we open up new community that higher land basis or higher land development costs.

We don't give out the level of detail between all those cost components, but again stable labor cost stable vertical costs, but higher land costs.

Okay. That's helpful. And then maybe on that mid to high single digits closing outlook for next year growth.

Hilla Sferruzza: Since we know it's front of everyone's mind, I wanted to quickly touch on our customers' credit metrics and what we're seeing in our mortgage operations over the last several quarters. Even with 80 to 85% of our buyers receiving some sort of financing incentives are qualified buyer profile remain consistent with our historical averages with PICO's near 740, DTI's around 41 to 42 and LTV's in the mid 80s. Since March of 2022, we have been offering some combination of rate lock and rate buy down assistance like our current 5.875% 30 year fixed rate lock.

How are you thinking about that in the context of the overall industry and what new home sales growth could look like and then in terms of just the health of the general consumer and the economy overall.

Yeah, I think generally what.

We've read and heard from the folks at.

Talk about the macro level given.

The backdrop of the used home market being locked up.

I think theyre expecting kind of low mid single digits. So we think that you know.

Hilla Sferruzza: However, she's rate locks were utilized by less than 20% of our closings in Q3, although usage has ticked up a bit in our Q4 backlogs. The rest of our customers are using other forms of less expensive financing incentives from 321 or 221 buy downs, arms and just traditional rate locks or rate buy downs. They're not part of our larger forward commitment. We expect utilization of financing incentives to remain elevated, and likely more costly, at least for the short term, as uncertainty around future interest rates is still driving a desire for rate locks.

Right for US we have the land.

In place to achieve.

That that growth as long as the market.

It doesn't regrets from here. So this is what we know.

No today are the current market conditions, what we're able to do in Q3 and what we're feeling in October.

We feel confident about that guidance and we think that will be.

Increasing our market share in the market. If we were able to accomplish that I would say also if you want to read the telegraph our commitment to a continuation of the rate locks right, where we're making a commitment to make sure that hit our absorptions paces Felipe mentioned to get to that number I can ask the community count base.

Hilla Sferruzza: As GNA leverage, in the third quarter of 2023 was 10.1% compared to 8.1% in the third quarter of 2022, higher commissions comprise about 130 bits of the change, with the balance primarily relating to higher employee count mostly within our startup markets, as well as the wage growth pressures. With our increased specs, we also had higher expenses quarter associated with maintaining this larger volume of inventory. We are actively working to reduce our SGNA leverage and expect long-term averages to be in the high single digits.

In order for your absorptions to hold steady at the current rates, we're committed to making sure that we're solving at home affordability question, whether that comes from rates coming down organically are helping.

It has to come down we're committed to making sure that we're in the affordable price and yeah. I mean after that obviously after experiencing the demand we did in Q3.

We're pretty optimistic that the spring selling season is going to be.

It's going to be there.

And what we're seeing today.

Hilla Sferruzza: In the third quarter of 2023, we recognize a loss on the early extinguishment of debt of $900,000 in connection with the 160 million partial redemption of our 6% senior notes due to 2025. There were no debt reductions in 2022. The third quarter's effective income tax rate was 22.4%, compared to 20.3% in 2022. Although the 2023 rate benefited from the energy tax credits at the higher $2,500 per home level in effect this year, nine months of energy tax credits were recognized last year in Q3 when the new energy tax rate was retroactively approved.

Sounds good thanks, very much guys.

Our next question comes from Alan Ratner with Zelman and Associates. Please state your question.

Yes.

Hey, guys. Good morning, Thanks for the time.

First question on the start pace I know you indicated that the goal. There is ultimately to match starts to sales, which are which certainly makes sense, but you've been running at a hotter pace recently on the start side, you've started about 20% more homes than contracts you've written the last.

Two quarters and it sounds like in the fourth quarter that gap is going to potentially widen further if you maintain a 4000 start pace. So what I'm trying to figure out if I take your initial 24 commentary on mid to high single digit growth.

Hilla Sferruzza: Overall, the lower gross margin, greater overhead cost and a higher tax rate partially offset by increased home closing revenue led to a 16% year-over-year decline in the third quarter 2023 diluted EPS to $5.98. This performance resulted in a book value per share of $121.29, up 20% year-over-year and a return on equity of 18.1%.

It doesn't quite get you to a 4000 quarterly unit run rate so.

At what point should we actually see orders converge with that level or is this an inflated start pace in something more than that to make 3000 might be your longer term target.

Right.

Yes, I think we're still catching up.

Hilla Sferruzza: To highlight a few items from the September 30, 2023 year-to-date results, compared to 2022, orders were up 4%, closings were up 5%, our home closing revenue increased 5% to 4.4 billion. We had a 540-bip decline in home closing gross margin to 24.7%, primarily due to more cost-based financing incentives. As GNA as a percentage of home closing revenue was 10.0% from higher commissions, compensation and technology spend, in that earnings declined 26% to $539.9 million.

Alan on.

The.

Inventory, we want by community.

We're getting there, but you know we like to have a third of our home finished a third of our homes that are ready to move into the next 30 60 days and then a third of our homes that are ready to move in.

90 days or 120 days, so we're not there on a key guy acuity basis certain communities, maybe up more but they are seeing higher absorptions. So it's this is really about is catching up and getting to where we want to be especially for the spring.

Not there yet I think as we are.

Hilla Sferruzza: As we turn to side 9, we wanted to share a follow-up to last quarter's upgrade by S&P. Such has also just elevated us to investment grade with a trip of D minus rating. We appreciate the two reading agencies, their recognizer discipline approach, the balance sheet management, even as we pursue a comprehensive plan that encompasses both growth in the business and returning capital to shareholders.

Cycle times have contracted we're getting a lot closer and so you're going to start to see that really kind of marry up starts marrying up with sales as we move into 'twenty 'twenty four but I feel like we still have some catching up to do right now.

Got it okay I appreciate that.

Second on the rate buy down dynamic I'm curious you know when you think about the incentives you're offering would you characterize it more as something that is needed to get perhaps a buyer off the fence and convince them to buy one of your homes versus a resale home or is the rate buy down actually necessary.

Hilla Sferruzza: We were very active this quarter in our capital spend activities through a three-pronged approach. First, we accelerated our investment in internal growth this quarter with $537 million spent on land acquisition and development, which was up 41% from prior year and up 31% sequentially. On a year-to-date basis, we spent 1.3 billion and we expect full-year 2023 land spend to total north of our prior expectation of 1.5 billion. As we replenish our land portfolio after a short hiatus from land acquisitions, this started in the latter half of 2022.

To get that buyer to qualify meaning they perhaps can't qualify at an 8% rate and they need it 6% or something in the fixes to the actually qualify for the mortgage.

Yeah Alan against Leap.

I hate to phone and the answer here, but we're a community by community business.

So I would say in certain markets and communities, we need those rate locks to achieve our four net sales per per month.

Hilla Sferruzza: As for the next year and onwards, we plan to spend $2 billion plus on land acquisition and development as we look to grow our community count 10% to 15% on an annual basis. Second, we also prioritize returning cash to shareholders by repurchasing over $300,019 shares of common stock for $45 million as quarter. This brings our year-to-date 2023 spend to $55 million, buying back about 413,000 shares of stock, or 1.1% of shares outstanding at the beginning of the year.

And that's to get folks qualified.

In other communities.

It's more of just in replacement of you know nicer cabinets or a move in ready appliance package or a little bit of a base price discount so everyone's using it differently.

We need it differently, depending on the market the community.

It's hard to answer that question in general it generalities, but obviously as rates continue to increase we're using more of it to get people qualified than we were maybe two quarters ago, but it's still it's still very much community by community and buyer by buyer. The only thing I would add is in all communities, it's a marketing tool right.

Hilla Sferruzza: Over 189 million remained available under our authorization program as of September 30, 2023, and will continue to be opportunistic with our share repurchases. This quarter, we also spent $9.8 million on our quarterly cash dividend payment of $0.27 per share, and it is our intent to reset the dividend amounts in the first quarter of each year. And lastly, we redeemed $150 million of our 6% senior notes through 2025 using our excess cash this quarter.

So it's critical.

Customers are looking for that so it's critical to advertise that to get them in the door. Once they're there we can walk through the benefits.

One financing solution versus another and kind of understand what their need is but I think it's critical today to have that as an advertising solution yet.

Hilla Sferruzza: $250 million remained outstanding under the notes as of September 30, 2023. Even given all of our internal and external capital uses, we continued to generate positive cash flows, maintained ample liquidity and a flexible balance sheet, and remained below a net that the cap ceiling of the high 20%. We had nothing drawn in our credit facility, cash of a billion dollars, and negative net that the cap of 1% at September 30, 2023, as well as generated $460 million in operating cash flows and $187 million of total cash flows. So far this year.

Just like the one I described the markets in the west, we probably need more and more of those rate locked in the west to qualify people than we do in Texas for example, or Florida or the south.

Got it I appreciate it guys.

Yeah. Thank you.

Our next question comes from Carl Reichardt with BTG. Please go ahead.

Thanks, everybody.

You've talked about sort of thinking about land banking option on a go forward basis is something you might utilize more and so what's changed here I mean, the balance sheets.

Hilla Sferruzza: In the last five to seven years, we have been disciplined in reinvesting back in the company and repurchasing equity. This year, we also implemented implemented paying quarterly cash dividends.

Good a shape as it has been <unk> been self developing for a long time.

And so I'm just sort of interested in your thinking on on making that switch over time.

Hilla Sferruzza: It is our intent to continue prioritizing both growth in the business and returning cash to shareholders, and we have structured our capital plan to do so on to slide time. We picked up momentum on land deals in Q3 by putting approximately 5,000 new lots under control compared to about 2,800 and Q2. We owned a control of total of about 60,700 lots of quarter and slightly higher than when we started a quarter.

I would say, maybe the Q Q big changes would be.

Expectation for future growth.

Its fairly robust so remind me so we're still going to continue to use our own balance sheet of course.

But we can supplement that anchor.

Even faster paced ever also using third party financing and the other item that we mentioned in our prepared remarks is the stabilization of the market.

Hilla Sferruzza: This equated to 4.2 years supply of lots at September 30, 2023, which compared to about 66,300 lots or 5.1 years supply of lots at September 30, 2022. The new lots out of this quarter represent 37 future communities, all for entry-level products. We also have almost 30,000 of additional lots where we're still undergoing due diligence that we're actively pursuing. Our ability to source land that meets our return hurdles has not been impeded by the flow of recent land acquisition activity.

Extended timelines and cost Boston land development over the last couple of years has it has made the math the model on land banking difficult right ear pain carry costs and the timelines are extending and it's outside of your control. So we were really kind of pausing and waiting for the market conditions to stabilize so that we can understand the actual burn.

That attach it to every lot from a land banking development perspective, I think we're now very close to a point, where we're feeling confident in the timelines and budgets and land development and it makes a lot of Suntrust.

Hilla Sferruzza: Land is always competitive, but we have been successful in finding dirt that underwrites to afford net sales per month pace and our IRR in gross margin hurdles, assuming today's current ASPs and direct costs. About 74% of our total lot inventory at September 30, 2023 was owned and 26% was optioned. In the prior year, we had a 69% owned inventory and a 31% option lot position. While we're always looking for ways to carry our land off-book, we don't artificially create a financing vehicle to target a specific percentage of option land.

Leverage that tool.

Where that.

The capacity and the margin on the deal allows for it.

Thank you that's that's a great answer I appreciate that and then.

Purchased 45 million I think this quarter repurchase stock you've been sort of up and down on that over time with the model now shifting towards one where youre generating cash on a more consistent basis and my guess is you would expect to continue to do that more so than than the than the more volatile cash generation periods in the past.

Is your expectation that share repurchase is you're now going to be a more permanent part of the capital reinvestment plan for maritime. Thanks.

Hilla Sferruzza: We have land banks when it makes sense for a specific deal. Otherwise, we've been able to fund our growth through retained earnings. Our balance sheet is in good shape, especially in light of the recent upgrades to investment grade, and we look to leverage this cheaper capital. While we haven't been an active player in the land banking markets recently, as we look to grow our land position and we see market conditions stabilizing, we do intend to utilize land banking more frequently in the near future.

Yeah. It is I mean, we've already been always been very programmatic.

About not diluting our shareholders recently, we've been even more programmatic about taking more shares out of the system then we put in.

He gets a great way to return shareholder value.

As long as it balances out with our ability to grow our business and generate revenue growth on the top line through.

Hilla Sferruzza: Finally, I'll direct you to side 11 for our guidance. Our spec strategy combined with cycle times that has started to normalize, give its visibility into the next quarter's potential closing universe based on our over 3,600 units and backlogs and another approximate 4,900 specs in the ground today. For Q4, 2023, we are projecting total closings to be between 3,500 and 3,700 units, home closing revenue of 1.45 to 1.53 billion. Home closing gross margin of 25 to 26%, an effective tax rate of about 23%, and eluded EPS in the range of $4.84 to $5.43.

Market share and community count growth in order. So it's a it's a key part of our strategy for returning capital back to our shareholders and especially when you know are our stock prices trading below book.

It just seemed like the responsible thing to do when we can buy buy our land at below book.

Below book, when we know our land is worth above book itself, we continue to do that.

Thank you Felipe.

Our next question comes from Susan Mcclary with Goldman Sachs. Please state your question.

Thank you good morning, everyone. Thanks for taking the questions.

Hilla Sferruzza: Well, we expect different to provide 2024 guidance next quarter. We do anticipate an acceleration in our closing units in the mid to high single digits next year.

I am I think during the commentary you talked a bit about the construction times continuing to improve during the quarter can you talk about the key constraints, perhaps that are still out there that are.

Steve Hilton: With that, I'll turn it back over to sleep. Thank you, Hilla, to summarize on slide 12. In the third quarter of 2023, we focused on pace by offering financing incentives and achieve the average exhaustion pace just above our internal goal. We believe housing market demand will remain steady in the near future, although it was the turn of normal seasonality and some near-term volatility from interest rate concerns. We will continue adjusting our suite of financing incentives in order to maintain our sales pace target.

Preventing that from going back to where we were before the pandemic and any thoughts on the cadence at which that can continue to come down.

You know, we're really close to getting back to where.

Where we were pre pandemic, we probably have a couple more weeks of opportunity.

I think the constraints continue to be the same ones, mostly on the front end.

Steve Hilton: With higher order volumes, we gain the operational efficiencies and improve leverage of thick costs to drive better financial results. We believe in our proven business model of pre-starting 100% of our entry-level homes. We are replenishing our moving ready inventory with approximately 4,000 starts to quarter to line with our sales pace and to meet the anticipated Q4 and 2024 spring selling season demand. With normalizing cycle times, we can deliver homes faster and turn our inventory three times a year.

Of the business.

Cool.

Putting down our foundations framing our house and those type of things, but Scott.

Especially with all of the increase in starts that are happening right now and all.

All the builders starting way more homes.

I think theres only so much more we're going to get in the near term.

But.

We're really pleased with what we've accomplished we can turn again, we can turn our business three times a year with our current cycle times.

Steve Hilton: Even with the choppiness in our community count on the next couple quarters, we believe we can deliver 13,525 to 13,725 homes this year and drive sustainable long-term growth.

We'll try to figure out if we can get those extra two weeks back to pre pandemic levels.

We may never get back go we'll see.

Operator: With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Thank you.

But that's that's what we're seeing in the market right now.

We've mentioned in response to a prior question that labor is stable.

Operator: And we'll now conduct our question and answer session. If you would like to ask a question, please press. Press star one on your telephone keypad. A confirmation tone will indicate that you're lying in the question queue. You may press star two if you would like to remove your question from the queue for participants doing speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

That's very true from a cost perspective, but the capacity is labor maybe increase it a little bit. So we're definitely seeing the same improvements in the marketplace with our peers.

Okay. That's helpful color.

Then you.

You mentioned also that you expect SG&A I think to move to the high single digit range kind of over time, but for the quarter. The SG&A came in a bit higher than where we were any thoughts on how we should be thinking about that just seasonally as we end the year and then you know over time, just the sort of keys to getting to that.

Truman Patterson: Our first question comes from Truman Patterson with Wolf Research, please state your question. Hey, good morning, everyone. Thanks for taking my questions. At first, just wanted a little bit of clarity on the fourth quarter, closing ASP guidance down about 6% sequentially. Just checking to see if that's primarily geographical, mixed shift, maybe a little bit more incentives, just seeing if you can provide some color on that. Yes. Thanks, Truman. It's mostly geographical.

Truman Patterson: We're expecting quite a bit of closing coming in from Texas, where we've seen really strong demand and some of the better cycle times. So a lot of it's geographical. The incentives we have are in the gross margin guidance. It's not a lot of incremental incentives in Q3 that are playing out in Q4, so it's mostly mixed. Okay, gotcha. So clearly that would imply perhaps a bit of a deceleration and orders out west and fleet.

At to that target that you talked about.

So I think it's the right high single digits is the right number over time, although the next couple of quarters, because that's the commitment that we've made to increase our community count and the land that we have under development youre going to see some incremental overhead and coming.

Coming through as we look to work through that pipeline once the revenue from those communities starts coming through they're going to see that rebalanced, but right now we're once again in a in a high growth period on the acquisition side and we're just a couple of quarter lag until those communities start to generate cash flows.

Okay, Alright, thank you for that good luck with everything.

Our next question comes from Joe <unk> Meyer with Deutsche Bank. Please state your question.

Hey, good morning, everybody. Thanks for the questions.

Truman Patterson: I think you mentioned Denver and Tucson being a little more pressured. I'm just trying to understand given the recent rate move if you could kind of go through the markets of the west and give a little bit more color there. Yeah, I mean, as we said in our opening comments, the west is still the part of our geographical footprint that's not contributing north of 4 net sales per month. I think we're seeing stronger performance in Southern California and generally in Phoenix, but Tucson and Colorado are a little bit of a drag where prices got really stretched over the last few years and with the rise and interest rates.

I Wonder when you talk about the community Count again, you know given the outlook for next year depends on that largely.

Can we just talk about how your visibility to that path to 300 and beyond may be different from how it was in the past even kind of before Covid. When you talked about 300, and then when you achieve 300 more recently because I'm just thinking about if you are.

Looking at communities, where you're targeting a specific absorption and you're using incentives to get people up to that there's probably less of a risk of sell out than maybe before and then as you've increased the land spend here and you're better positioned you might feel better about what you're able to bring online on the <unk>.

Truman Patterson: We've seen the affordability pressure. But everywhere is doing over three, most of them are doing three and a half. We're trying different things in those markets to capture capture the demand, but it's, you know, the west versus Texas versus the south is where we're seeing the so largest issues with the rate, rate volatility and acquiring customers. Okay, perfect. Thank you all. Thank you.

Gross side of bringing community counts online. So I'm just curious if you could talk through the puts and takes there.

Yes.

You answered it in your question, but.

The last time when we.

<unk> said, we were going into 300 communities.

We're going to do three or four net sales per month and now our assumption is we're going to do for so we understand sort of the demand and what the closeout scenarios are going to look like and we've invested in the land.

Steven Kim: Our next question comes from Steven Kim with Evercore ISI. Please do your question. Yeah, thanks a lot guys. Appreciate all the color. Particularly some of the longer-term commentary, you know, like community camp growth and stuff. That was a, and margins that's helpful.

Appropriately to build off of that assumption. So I think with that we have a lot better visibility that.

Under a four month type of environment, we can get to that growth for next year, obviously, we don't ever predict community count growth 12, 16 months out if we don't have the land under development and we're not working on those community. So I think everything.

Steven Kim: My question, my first question relates to, I think you referred to normal seasonality, potentially returning in 4Q, was just wondering if you could be a little more specific, how you think about absorptions. What is that kind of normal seasonality as you move from 3Q to 4Q? And then sort of, as well, I'm curious about following up on an incentive comment you made, was curious if you could tell us, what was the average rate that your, you know, the customer that used your finance company?

Being being worked on and actively developed today. So we have that visibility, even though it hasn't gotten any easier to open up communities municipalities municipal delays land development is still moving very very slowly I think we're getting better at understanding how long it is going to tape and be able to predict our business and we built in those.

Steven Kim: What is the average rate that they actually, you know, got? And what would you say it is now on the orders you're seeing coming in in 4Q? Yeah, I'll let Hilla answer the second part. The first thing I would say is October, we're kind of through October here and it feels a lot like what we just experienced in September. So, you know, it's still hard to say what normal seasonality is going to look like.

Longer cycles to open up communities into our forecast.

So with those two components I think we feel pretty good about what we're going to do next year.

That's great I appreciate that and then just thinking about the mix of either geographic mix, but primarily on the buyer segment side, what that might look like when you do get to 300 is it going to be less one of them. You. Then you even at today and then some of your peers have called out when they have sort of the shifting mix.

Steven Kim: I mean, when we think about seasonality, long terms, even, we feel like we're going to sell, you know, four to five net sales, kind of February through June, four sales, you know, July through September, October, and then, you know, maybe three to three and a half sales, you know, October through January when the holidays are. That's traditionally how our business has worked as long as I've been in it. It hasn't worked exactly that way the last four years, but that's how we generally think of our business when there's normal seasonality. I'm not saying we're experiencing that today, but we expect over time that I'll revert back to that. And then when you average that all out, that's four to four and a half net sales per month.

A year ahead of kind of what the ASP mix headwind could look like assuming just all other prices stable how should we think about potential mixed headwinds on the Asps next year.

Yeah, we're not prepared to give out guidance into 2024, yet there's a lot of moving parts and pieces as it relates to feeling comfortable with that but I think you know our mix is kind of what it is.

About 80% to 80% to 85% entry level in 20% to 15% one in you and frankly.

Those are migrating closer and closer because we just built a really nice entry level home or really value oriented one a new home.

So that's kind of going to be our mix, but we're not comfortable.

Steven Kim: So, that's how we think about it, long term, and then I'll let Hilla answer the incentive question. Sure. So, the incentive question, if you think about it, we've always had kind of around 80-ish percent captivating our in our mortgage company. It's a little higher than that, obviously, because we're offering the incentives, so we're having a higher take rate, so we're kind of mid-80s. And of that, of that buyer pool, which is the majority of our buyers, our Q3 numbers are right around 6 percent all in.

Our ASP at this point, because there's just too many things still moving around.

Understood. Thanks, a lot good luck.

Thank you.

Our next question comes from Jay Mccanless with Wedbush Securities. Please state your question.

Hey, Thanks. So the first question I had you talked about.

Your land cost starting to work through is that going to be more second half of 'twenty four given when you think the community count is going to ramp or is that something we should be thinking about for gross margin for all of 2024.

Steven Kim: We're seeing maybe about 25 dips higher than that right now as to what's going to get close out here, or scheduled to get close out here on Q4. So, there is a slight increase, although not material, and both rates are significant. We below the 8 percent that we're seeing in the marketplace. Yeah, no doubt. That's a super helpful, really encouraging as well.

That's kind of sequentially I would say, it's already starting to lead mentioned that part of our composition of our current gross margin is higher land cost already in Q3 and as communities changeover, it's going to become a more material portion of it until our entire competition as as our land portfolio is going to be that higher I'll land development.

Steven Kim: The second question I had for you in light of the Citiburnat case that just the jury took all of like two seconds to think about it. It seems like we might be seeing buyer commissions coming down in the next few years. I was curious if you could remind us what commissions represent as a percentage of your home sales revenue right now. I know that you said that it was a 130 basis point of the year of your chain, but what is the actual level at this point on Senator Rubenius.

Basis, I think if you're modeling I would say a slow growth and land basis from now until the end of 'twenty four is probably a safe assumption.

Okay.

And then.

Okay incentives could you talk about what those were in terms of either.

Dollars or percentage of average home price was <unk> 23, and what are you seeing now.

And the orders you're writing.

Yeah, we don't we don't give numbers out in that way, we actually market spec inventory. So the components are not really visible externally, it's not something that we give out although I think we mentioned that.

Steven Kim: So obviously traditionally it's about 3% in today's market. This is a marketing tool. This is a selling tool for us. So most markets are at three. Some markets particularly in Texas may be a little bit north of that, for we're trying not to touch five, but it's a market by market, sometimes community by community decision. And then our participation rate is running about three quarters. It's somewhere between 60, 70 and 75% of our homes are sold with a co-brook.

The decline in margin guidance between Q3 and Q4.

That's primarily the incremental incentives that we're expecting so you can see what the change is going to be quarter over quarter, but we don't provide I teach outs.

Okay, great. Thank you appreciate it.

Yes. Thank you.

Our next question comes from Alex Barron with housing Research Center. Please state your question.

Steven Kim: Okay, so what was the actual rate, though, that 130 based one year of year change? What was the actual number within S-G-N-A? I don't think we're going to get into that level of detail, but I can definitely say that in 2022, we were running very low. One to two percent is probably what we were paying in commissions at the time. And now I would say we're probably around three percent.

Yeah. Thank you.

I was hoping you guys could provide some type of statistics on what your average client looks like in terms of.

Steven Kim: Okay, thanks very much, guys.

Operator: Thank you.

Average household income average FICO average down payment.

Those types of things.

Yeah. So we had a little information on the prepared remarks.

Our average.

Our average customer is right around the seventh so maybe I should pathogen I think not too much has changed over the last decade honestly, we track this that monthly for the last decade and not not too much has changed we're right around the 740 FICO hovering right about rap alone any given month.

Mike Rehaut: Our next question comes from Mike Rehout with JP Morgan. Please go ahead. All right. Thanks. Good morning, everyone. Just appreciate the kind of forward look on 24 talking about closings up mid to high single digits. I'm curious if you could kind of give us a sense of, you know, it's that growth you expect to be predominantly driven by community count. And, you know, I don't know if you kind of gave an update. I apologize if I missed it. Where you expect community count to finish out this year.

LTV is in the mid eighties DTI.

DTI 40, 40, 41 42, depending on if it's an entry level or first time move up that's kind of held steady so we're fairly comfortable.

With the credit credit profile of our customer they can definitely up for the house.

They're getting into.

Okay, what about the average income.

I don't believe we provide back we'll go back and check to see if that's in the stats that we provide but if not that's not a new data metric recognize we're going to provide in the car because theres no context, our historical historical baselines.

Steve Hilton: Yeah, we didn't give out any guidance for this year. As we said in our comments, we think it's going to be choppy here for the next quarter, but we also said that we do expect community count growth into the back half of next year in 2025. So we're not expecting that our absorption rates per store are generally going to increase from where they're at. We're hitting our four target. So, I guess, you know, they're, they're analyzing the answer, right?

Okay.

How about.

In terms of your incentives what what percentage of.

Asps are they.

Do they represent today, either in closings and backlog versus say a quarter or two ago.

Steve Hilton: It's, it's community count growth throughout 2024, mostly in the back half of next year. Okay, great. Now, I appreciate that. I guess, secondly, just to clarify on the answer before talking around incentives and, you know, around how that's impacting the current gross margins, you know, I guess, you know, with the 4Q gross margin guidance, given obviously your spec model in the, you know, more rapid reflection of current market conditions in your, in your numbers, sooner than later, all SQL.

So I think we just answered. This question, we don't provide information on incentives as either a percentage or a dollar amount.

Our homes are listed.

As a completed homes, we fell back inventory to the market prices as an all in price that we don't want to start to break those components out and provide a competitive disadvantage to ourselves and we.

We will say that 80% to 85% of our customers are using some sort of financing incentives.

Fairly material amount and we expect that that trend to continue and as we've mentioned, we expect that Q4 utilization of the more expensive theyre more costly.

And seeing incentives to increase which represents the.

Steve Hilton: It's fair to say that the gross margins guidance for 4Q largely reflects the more recent changes than incentives and perhaps higher, you know, more expensive rate pridowns that, that's, you know, the industry is kind of absorbing at this point. Yeah, that's 100% fair. I mean, it's 100% accurate, right? Our fourth quarter guidance, most of those sold, our, most of those homes are sold. We've locked those folks in at the rate that we need to to get them through the homeowner, homeowner's journey.

That change in the margins in the $26 seven that we earned in Q3 to the 25% to 26% guidance that we gave for Q4 that is primarily a reflection of.

Incremental incentive usage.

Got it okay. Thanks a lot.

Thank you.

Our next question comes from Jade Rahmani with K B W. Please state your question.

Hi, just to follow up on the mortgage buy down question, it's 200 basis points. The limit in terms of benefit you can pass on to customers through that and as full term buy down the most common option that buyers are preferring.

Steve Hilton: So it's captured in our fourth quarter guide, what we're, what we're utilizing to acquire Great, thanks so much, good luck. Yeah, thank you.

It depends on the buyer to be honest I take your second question first.

A lot of folks are looking for.

Assistance on the entire payment for the 30 years that is the most common.

John Lovallo: Thank you, our next question comes from John Lovallo with UBS, please state your question. Hey guys, thank you for taking my questions as well. You know, maybe on the cost side, I think you mentioned relatively stable year-of-year costs in the third quarter. Can you just help us maybe break this out a little bit between what you saw for land, labor, and materials? You know, were they all sort of similar on a year-of-year basis, or were there some offsets with them put in that group?

The most common type of financing incentives, but a lot of folks are needed three Q1 or in Q1 by downright theyre willing to take the extra incentive money and apply it to something else. They just needed assistance in its first year or two and they're comfortable.

Comfortable with that we're also heavily marketing arms.

Where you can get to with a seven six arm's pretty impressive average American doesn't stay in their home more than seven years. So we're trying to increase the education on that front and we're seeing some some traction there.

John Lovallo: Yeah, so I would say you're talking about year-over-year? Yes. Yeah, so it's a, we've obviously shared what our direct costs have done year-over-year, most of that's been lumber, but they're across the moth, that's another place, so it's relatively stable. Labor has been also stable for the most part, but certainly higher land costs are flowing through as we open up new communities at higher land basis or higher land development costs. We don't give out the level of detail between all those cost components, but again, stable labor costs, stable vertical costs, but higher land costs.

I'm, sorry, I forgot the first the first part of the Chrysler 200 basis points, it's actually 300 basis points by I think a couple of our peers have mentioned this on their calls as well that is if you are doing on an incentive for that buyer for that home. The forward commitment that most of the large.

Builders are purchasing are actually outside of that limit. So theres an opportunity to provide an incentive that's in excess of that 300 banks, which is another advantage over the existing home market.

They had that governor.

So the incremental margin.

Impact that you mentioned going from the 26, 7% to the 25, five 120 basis points does that reflect roughly 300 basis points of impact.

John Lovallo: Okay, that's helpful. And then you know, maybe on that mid-to-high single-digit closing outlook for next year growth, how are you thinking about that in the context of the overall industry and what new home sales growth could look like, and then in terms of just the health of the general consumer and the economy overall? Yeah, I think generally what we've read and heard from the folks that talk about the macro level, you know, given the backdrop of the used home market being locked up, you know, I think they're expecting kind of low mid-single digits, so we think that's, you know, about right for us.

No that's just incremental change from Q3 to Q4.

Right, that's the incremental change of usage of financing incentives or the more costly financing incentives are more folks using them. So so.

We need to maybe not focus on this 300, everyone is exceeding the 300 theres no rate locks that youre buying that's attractive to a buyer at 300 docs why that builders are giving the forward commitment. So that amount is in excess of 300, but as we mentioned less than 20% of our closings in Q3 actually use that for.

John Lovallo: We have the land in place to achieve that growth as long as the market doesn't regress from here. So this is what we know today, the current market conditions, what we're able to do in Q3 and what we're doing in October, we feel confident about that guidance and we think that will be, you know, increasing our market share in the market if we're able to accomplish that. I would say also, if you want to read through a telegraph, our commitment to the continuation of the rate locks, right, we're making a commitment to make sure that to hit our absorption space, the salute mentioned, we're to get to that number, it's mostly community count base, so because in order for the absorption to hold steady at the current rate, we're committed to making sure that we're solving the home affordability question, whether that comes from rates coming down organically or us helping the rates to come down, we're committed to making sure that we're in the affordable price band. Yeah, I mean, after obviously after experiencing the demand we did in Q3, we're pretty optimistic that the spring selling season is going to be there based on what we're seeing today.

Percentage, so I think that.

We should think of it more broadly.

John Lovallo: Sounds good. Thanks very much, guys.

300, that's available.

Okay.

Got it thanks very much.

Of course, thank you.

Yeah.

Okay.

Our next question comes from Ken Zenner with Seaport Research partners. Please state your question.

I appreciate the details on the.

Incentive structure, it is kind of confusing, but it seems like builders, who want a special soft there.

Couple of questions here first am I getting the price.

And I think I'm doing the math right, but the ASP is going down in the fourth quarter correct.

For your guidance.

Yes.

Yeah. That's fine I mean is there I guess I haven't heard you guys discussed that much in terms of that regional or did you just reset because obviously incentives has something to do with you know the gross price can you talk to that a little bit before me and then I have one more question.

Yeah as I said in my opening comments and as well as the first question, it's largely mix, we're not we're not.

Alan Ratner: Our next question comes from Alan Ratner with Zellman and Associates.

Cutting our prices.

Alan Ratner: Please sit your question. Hey guys, good morning. Thanks for the time. The first question on the start pace, I know you indicate the goal there is ultimately to match starts to sell, which certainly makes sense. But you've been running at a hotter pace recently on the start side. You've started about 20% more homes than contracts. You've written the last two quarters and it sounds like in the fourth quarter that gap is going to potentially widen further if you maintain a 4,000 start pace. I'm trying to figure out if I take your initial 20% for commentary on mid to high single digit growth. That still doesn't quite get you to a 4,000 quarterly unit run rate.

In today's market. So there is some incentives here and there we're doing the right options, we said, but primarily what's driving the ASP.

The decline in Q4 over Q3 as geographical mix, we're getting a lot more closings out of some of our entry level communities across the country.

It seems like a big mix shift quarter to quarter as there was it a big closeout related I mean it.

Right, I mean quarter to quarter.

It seems like a big deal.

We could certainly get you more details if you'd like but that's alright.

I just wanted to be.

Focus on that one more time, alright, so look here's my main question.

I'm glad we're not focusing on monthly pace do you have your forest target, it's kind of swing around it seems like things are stabilizing could you talk to.

Steve Hilton: So at what point should we actually see orders converge with that level, or is this an inflated start pace and something more in the mid to 3,000 might be your longer term target? I think we're still catching up on having the inventory we want by community. We're getting there, but we like to have a third of our homes finished, a third of our homes that are ready to move into the next 30, 60 days and then a third of our homes that are ready to move in in 90 days or 120 days.

The gross margins you have now I believe you mentioned you know a more normalized gross margin of 22%.

Given your pace concept is that it.

Did I hear that correct.

Yes, I think what you've heard is that historically, we feel like over time, we can underwrite to somewhere between 'twenty, one and 'twenty two.

Direct gross margin.

When we're buying new land et cetera.

Our margins are much higher than that today, because we have cheap land flowing through market strong et cetera, et cetera, but 'twenty one to 'twenty two is kind of our long term outlook over time.

Steve Hilton: So we're not there on a community basis, certain communities maybe have more, but they're seeing higher absorptions. So this is really about catching up and getting to where we want to be, especially for the spring. We're not there yet. I think as we cycle times has contracted, we're getting a lot closer. And so you're going to start to see that really kind of marry up starts marrying up with sales as we move into 2024. But I feel like we still have some catching up to be right now.

Things are normal.

Right and I appreciate that.

Larry because.

I've been a tie it into your four target in terms of what that kind of implies from a return on capital perspective.

Perspective, if you would thank you very much.

Perfect. Thank you.

Okay.

So thank you very much operator, I think that was our last question. We appreciate everyone being on the call. Today appreciate all the questions and interest in our organization and we will look forward to talking to you next time. Thank you.

Steve Hilton: Got it. Okay, I appreciate that. Second, on the rate by down dynamic, I'm curious, you know, when you think about the incentives you're offering, would you characterize it more as something that is needed to get, you know, perhaps a buyer off the fence and convince them to buy one of your homes versus a refill home? Or is the rate by down absolutely necessary to get that buyer to qualify, meaning they perhaps can't qualify it in eight percent rate and they need a six percent or something in the six is to actually qualify for the mortgage.

Thank you. This concludes today's call all parties may disconnect have a good day.

Steve Hilton: Yeah, Alan again, sleep. I mean, I hate to phone in the answer here, but we're a community by community business. So I would say in certain markets and communities, we need those right locks to achieve our four net sales per per month. And that's to get folks qualified in other communities. It's more of just in replacement of, you know, nicer cabinets or a moving ready appliance package or a little bit of a base price discount.

Steve Hilton: So everyone's using it differently. We need it differently, depending on the market, the community. So it's hard to answer that question in general, generalities, but obviously as rates continue to increase, we're using more of it to get people qualified. Then we were maybe two quarters ago, but it's still it's still very much community by community and buyer by buyer. The only thing I would add is in all communities, it's a marketing tool, right?

Steve Hilton: So it's critical. The customer is looking for that. So it's critical to advertise that to get them in the door. Once they're there, we can walk through the benefits of one financing solution versus another and kind of understand what their need is, but I think it's critical today to have that as an advertising solution. But just like when I described the markets in the West, we probably need more and more of those rate locks in the West to qualify people than we do in Texas, for example, or Florida or the South.

Carl Reichardt: Thank you.

Carl Reichardt: Our next question comes from Carl Reichardt with BTIG, please go ahead. Thanks, everybody. Hilla, you talked about sort of thinking about land banking option on a go-forward basis as something you might utilize more. And so what's changed there? I mean, the balance sheets is in, you know, as good a shape as it has been, you've been self-developing for a long time. And so I'm just sort of interested in your thinking on making that, that switch over time.

Carl Reichardt: I would say maybe the two big changes would be our expectation for future growth. I think it's fairly robust. So we want to make sure we're still going to continue to use our own balance sheet, of course. But we can supplement that in growing even faster pace if we're also using third-party financing. The other item that we mentioned are prepared to mark is the stabilization of the market. The extended timelines and cost busts on land development over the last couple of years has made the mass the model on land banking difficult, right?

Carl Reichardt: Your paying carry costs and the timelines are extending in its outside of your control. So we're really kind of pausing and waiting for the market conditions to stabilize so that we understand the actual burden that attaches to every lot from a land banking development perspective. So I think we're now very close to a point where we're feeling confident in both the timelines and the budgets on land development. It makes a lot of sense for us to leverage that tool where the capacity in the margin on the deal allows for it.

Carl Reichardt: Thank you. That's a great answer. I appreciate that. And then you've purchased 45 million. I think this quarter repurchased stock. You've been sort up and down on that over time with the model now shifting towards one where you're generating cash on a more consistent basis. And I guess as you'd expect to continue to do that more so than than the more volatile cash generation periods in the past, is your expectation that Sherry purchased is you're not going to be a more permanent part of the capital reinvestment plan for Emeritus?

Carl Reichardt: Thanks. Yeah, it is. I mean, we've already been always been very programmatic about not diluting our shareholders. Recently, we've been even more programmatic about taking more shares out of the system than we put in. I think it's a great way to return shareholder value as long as it balances out with our ability to grow our business and generate revenue growth on the top line through market share and community account growth in order.

Carl Reichardt: So it's a key part of our strategy for returning capital that's our shareholders. And especially when our stock price is trading below book, it just seems like the responsible thing to do when we can buy our land at below book when we know our land is worth above book. So we could be able to do that. Thank you, Philly.

Susan Maklari: Our next question comes from Susan McClaury with Goldman Sachs. Please state your question. Thank you.

Susan Maklari: Good morning, everyone. Thanks for taking the questions. I think that during the commentary, you talked a bit about the construction times continuing to improve during the quarter. Can you talk about the key constraints perhaps that are still out there that are kind of preventing that from going back to where we were before the pandemic and any thoughts on the cadence that we're that can continue to come down. You know, we're really close to getting back to where we were pre-pandemic.

Susan Maklari: We probably have a couple more weeks of opportunity. I think the constraints continue to be the same ones mostly on the front end of the business, you know, putting down our foundations, framing our house and those type of things. But especially with all the increase in start stuff that are happening right now and all the builders starting way more homes, you know, I think there's only so much more we're going to get in the near term.

Susan Maklari: But we're really pleased with what we've accomplished. We can turn, again, we can turn our business three times a year with our current cycle times. We'll try to figure out if we can get those extra two weeks back to pre-pandemic levels. We may never get back there, we'll see. But that's what we're seeing in the market right now. I think Phillippe mentioned in response to our prior question that labor is stable. It's very true from a cost perspective, but the capacity of labor has maybe increased a little bit. So we're definitely seeing the same improvements in the market places our peers. Yeah.

Susan Maklari: Okay, that's helpful color. And then you mentioned also that you expect SNA. I think to move to the high single digit range kind of over time. But for the quarter of the SNA came in a bit higher than where we were. Any thoughts on how we should be thinking about that just seasonally as we end the year. And then, you know, over time, just the sort of keys to getting to that target that you talked about.

Susan Maklari: So I think it is the right high single digit is the right number over time, although the next couple of quarters with the commitment that we've made to increase our community crown in the land that we have under development, you're going to see some incremental overhead coming through as we look to work through that pipeline. Once the revenue from those communities starts coming through, you're going to see that rebalance. But right now, we're once again in a in a high growth period on the acquisition side and we're just a couple quarter lag until those communities start to generate cash flows.

Susan Maklari: Okay, all right. Thank you for that.

Operator: Good luck with everything.

Joe Ahlersmeyer: Our next question comes from Joe Allersmire with Deutsche Bank. Please do your question. Hey, good morning, everybody. Thanks for the questions. I want to talk about the community count again. You know, given the outlook for next year, depends on that largely. Can we just talk about how your visibility to that past the 300 and beyond may be different from how it was in the past, even kind of before COVID when you talked about 300 and then when you achieved 300 more recently, because I'm just thinking about if you are looking at communities where you're targeting a specific absorption and you're using incentives to get people up to that, there's probably less of a risk of sell out than maybe before.

Joe Ahlersmeyer: And then as you've increased the land spent here in your better position, you might feel better about what you're able to bring online on the the the gross side of bringing community counts online. So just curious if you could talk through the puts, and takes there. Yeah, I think you answered it in your question, but the last time when we kind of said we were going to 300 communities, the assumption we were going to do three or four net sales per month, and now our assumption is we're going to do four.

Joe Ahlersmeyer: So we understand sort of the demand and what the closed out scenarios are going to look like, and we've invested in the land appropriately to build off of that assumption. So I think with that, we have a lot better visibility that, you know, under a four a month type of environment we can get to that growth for next year. Obviously, we don't ever predict community count growth 12, 16 months out if we don't have the land under development and we're not working on those communities.

Joe Ahlersmeyer: So I think everything's, you know, being worked on and actively developed today. So we have that visibility, even though it hasn't gotten any easier to open up communities, municipal, municipal delays, land development is still moving very, very slowly. I think we're getting better at understanding how long it's going to take and be able to predict our business, and we've built in those longer cycles to open up communities into our forecast.

Joe Ahlersmeyer: So with those two components, I think we feel pretty good about what we're going to do next year. That's great. Appreciate that. Then just thinking about the mix of energy, graphic mix, but primarily on the buyer's segment side, what that might look like when you do get to 300, is it going to be less one in you than you're even at today? And then some of your peers have called out when they have sort of the shifting mix a year ahead kind of what the ASP mix headwind could look like assuming just all other prices stable.

Joe Ahlersmeyer: How should we think about potential mix headwinds on ASP next year? Yeah, we're not prepared to give out guidance in the 2024 yet. There's a lot of still moving parts and pieces as it relates to feeling comfortable with that, but I think our mix is kind of what it is. I think we're about 80 to 85% entry level and 20 to 15% one in you. And frankly, those are migrating closer and closer because we just feel they're really nice entry level home or really value oriented one in you home. So that's kind of going to be our mix, but we're not comfortable guiding out ASP at this point because there's just too many things still moving around. Understood.

Joe Ahlersmeyer: Thanks a lot.

Jade Rahmani: Good luck. Our next question comes from Jay McCannless with webbush securities. Please state your question. Okay, thanks. So the first question I had you talked about higher land cost starting to work through. Is that going to be more second half than 24 given when you think the community count's going to ramp or is that something we should be thinking about for Gross Margin for all of 2024? That's kind of sequential.

Jade Rahmani: I would say it's already started. So we've mentioned that part of our composition of our current Gross Margin is higher land cost already in Q3. As communities change over, it's going to become a more material portion until our entire composition of our land portfolio is going to be that higher land development basis. So I think if you're modeling, I would say slow growth and land basis from now until the end of 24 is probably a phase of fun, and then incentives.

Jade Rahmani: Could you talk about what those were in terms of either dollars or percentage of average home price for 3Q, 23, and what are you seeing now and what's in the order you're writing? Yeah, we don't give numbers out in that way. We actually market spec inventory, so the components are not really visible externally. It's not something that we give out, although we mentioned that the decline in margin guidance between Q3 and Q4, that's primarily the incremental incentives that we're expecting, so you can see what the change is going to be quarter over quarter, but we don't provide details. Okay, great. Thank you. Appreciate it.

Jade Rahmani: Thank you.

Alex Barron: Our next question comes from Alex Barron with Housing Research Center.

Alex Barron: Please state your question. Yeah, thank you. I was hoping you guys could provide some type of statistics on what your average client looks like in terms of you know average household income, average FICO, average down payment, those types of things. Yeah, so we had a little information that prepared remarks. Our average customer is right around the seventh. So maybe I should present it by saying, not too much has changed over the last decade.

Alex Barron: Honestly, we track this monthly for the last decade and not too much has changed. We're right around the 740 FICO, hovering right above, right below, in any given month. LTV is in the mid 80s. DTI, 40, 40, 41, 42, depending on if it's an entry level or a first time move up, that's kind of held steady, so we're fairly comfortable with the credit, credit profile of our customer. They can definitely afford the house that they're getting into.

Alex Barron: Okay, what about the average income? I don't believe we provide that. We'll go back and check to see if that's in the stats that we provide, but if not, that's not a new data metric we're going to, we're going to provide in the call because there's no context for historical, historical baselines. Okay.

Alex Barron: How about in terms of your incentives, you know, what percentage of ASP do they represent today either in closing or in backlog versus say a quarter or two ago? I think we just answered this question. We don't provide information on incentives as either a percentage or a dollar amount, since our homes are listed as a completed home. We sell spec inventory, so the market price is an all-end price that we don't want to start to break those components out and provide a competitive disadvantage to ourselves, but we will say that 80 to 85% of our customers are using some sort of financing incentives, so it's a fairly material amount, and we expect that trend to continue, and as we've mentioned, we expect a Q4 utilization of the more expensive, the more costly financing incentive to increase, which represents the change in the margin from the 26.7 that we learned in Q3 to the 25 to 26 percent guidance that we gave to Q4, that's primarily a reflection of incremental incentive usage.

Alex Barron: Okay, thanks a lot. Thank you.

Jade Rahmani: Our next question comes from Jade Rahmani with KBW, please state the question. Hi, just to follow up on the mortgage buy-down question, it's 200 basis points, the limit in terms of benefit you can pass on to customers through that, and it's full term buy-down, the most common option that buyers are preferring.

Jade Rahmani: Depends on the buyer, to be honest, I'll take your second question first. A lot of folks are looking for assistance on the entire payment for the 30 year. That is the most common, the most common type of financing incentive, but a lot of folks need a 3-2-1 or a 2-1 buy-down, right? They're willing to take the extra incentive money and apply it to something else. They just need an assistance in this first year or two, and they're comfortable with that.

Jade Rahmani: We're also heavily marketing arms, where you can get to with a 7-6 arm is pretty impressive. Aberde-American doesn't stay in their home more than seven years, so we're trying to increase the education on that front, and we're seeing some traction there.

Jade Rahmani: I'm sorry, I forgot the first part of the question. 200 basis points, it's actually 300 basis points, but I think a couple of our peers have mentioned this on their calls as well. If you are doing an incentive for that buyer, for that home, the forward commitments that most of the large builders are purchasing are actually outside of that limit, so there's an opportunity to provide an incentive that's an excess of that 300 basis.

Jade Rahmani: Which is another advantage over the existing home market, which they had that governor. So the incremental margin impact that you mentioned going from the 26-7 to the 25-5 120 basis points, does that reflect roughly 300 basis points of impact? No, that's just incremental change from Q3 to Q4, right? That's the incremental change of usage of financing incentives, or the more costly financing incentives, or more folks using them. So I think we need to maybe not focus on this 300.

Jade Rahmani: Everyone is exceeding the 300. There's no rate lock that you're buying that's attracted to a buyer at 300. That's why the builders are doing the forward commitments, so that amount is in excess of 300, but as we mentioned, less than 20% of our closings in Q3 actually use that percentage, so I think that we should think of it more broadly than just the 300 that's available.

Jade Rahmani: Got it.

Ken Zener: Thanks very much. Of course, thank you.

Ken Zener: Our next question comes from Ken Zener with C-Port Research Partners. Please do your question. Appreciate the details on the incentive structure. It is kind of confusing, but it seems like the builders are one of the special softs there. A couple of questions here. First, am I getting the price, I think I'm doing the math right, but the ASP is going down in the fourth quarter, correct? For your guidance? Yeah, and that's fine.

Ken Zener: I guess I haven't heard you guys discuss that much in terms of the regional, or did you just reset? Because obviously incentives has something to do with the gross price. Can you talk to that a little bit before my—and then I have one more question. Yeah, as I said in my opening comments and as well as the first question, it's largely mixed. We're not cutting our prices in today's market. So there's some incentives here and there.

Ken Zener: We're doing the rate locks, as we said, but primarily what's driving the ASP decline in Q4 over Q3 is geographical mix. We're getting a lot more closings out of some of our NT-level communities across the country. It seems like a big, mixed shift quarter to quarter. Is there, was it a big closeout related, I mean, it's, you're right, I mean, quarter to quarter only. It seems like a big challenge. We can certainly get you more details if you like, but okay, that's right. No, no, I mean, I just, I just want to be focused on that one more time.

Ken Zener: And all right, so look, here's my main question. I'm glad we're not focusing on monthly pace. Do you have your forest target? It's going to swing around. Seems like things are stabilizing. Could you talk to the gross margins you have now? I believe you mentioned, you know, more normalized gross margin of 22% given your pace concept. Is that, did I hear that correct? Yeah, I think what you've heard is that historically we feel like over time we can underwrite to somewhere between 21 and 22, direct gross margins when we're buying new land, et cetera.

Ken Zener: Obviously our margins are much higher than that today because we have to keep land flowing through markets strong, et cetera, et cetera. But 21 to 22 is kind of our long-term outlook over time if things are normal. Right, and I appreciate that clarity because I've been to tie it into your four target in terms of what that kind of implies from a return on capital perspective, if you would. Thank you very much. Perfect. Thank you. So thank you very much operator.

Steve Hilton: I think that was our last question.

Steve Hilton: We appreciate everyone being on the call today. Appreciate all of the questions and interest in our organization.

Operator: And we'll look forward to talking to you next time. Thank you. This concludes today's call-up part.