Q1 2024 Meritage Homes Corp Earnings Call

Hello, and welcome to the Meritage homes first quarter 'twenty 'twenty four analyst call.

And once you require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.

If you place into the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce your host Emily to Donald Vice President Investor Relations and ESG. Please go ahead Emily.

Emily: Thank you operator, good morning, and welcome to our analyst call to discuss our first quarter 'twenty 'twenty four it yourself with it.

Emily: The press release yesterday after the market closed.

Emily: 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.

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

Emily: 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.

Emily: 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 as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically, our 2023 enamel.

Emily: The report on Form 10-K.

Emily: We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures.

Emily: With us today to discuss our results are detailed Payne executive Chairman Phillipe, Lord CEO and he was 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 later today I'll now turn it over to Mr. Hilton Steve. Thank you Alwyn.

Welcome to everyone listening in our call I will briefly discuss current market trends and our recent accomplishments.

Steve: I'll cover highlights of our operational performance and how our strategy is driving our success.

Hello, Brian.

Emily: A review of the first quarter and our forward looking guidance for Q T in full year 'twenty four.

Emily: Mortgage had a remarkable structure of the year.

Emily: She'd been average absorption pace of 4.9 sales per month.

Emily: First quarter 2024, which resulted in our highest quarterly change orders totaling 3991 homes.

Emily: During the spring selling season with a healthy supply of move in ready inventory, we were able to capitalize on strong market conditions generally by the increasing need for housing.

Emily: Any holes in gmg as well as the move down to <unk>.

Emily: We continue to refine our limited inventory limited availability of resale housing supply.

Emily: The first quarter of this year, a record backlog conversion of 138% drove 3570 home deliveries, which led the home closing revenue of $1 5 billion.

Emily: Home closing gross margin for the quarter was 25, 8%.

Emily: Combined with SG&A at 10, 4% resulted in diluted EPS of $5.06.

Emily: As of March 31, 2024, we increased our book value per share, 17% year over year to $129.98 and generated a return on equity of 18%.

Emily: Although visibility into what interest rate mortgage rates will do for the remainder of the year remains unclear. We believe that by satisfying homebuyers desire to have quick closing timelines.

Emily: Global inventory should position us to continue to increase our market share.

Emily: Now onto slide four for our recent milestones.

Emily: Every time, we go during the month, we celebrate Earth day, we can announce Meredith was 11 award at the Epa's Energy Star partner of the year.

Emily: The sustained excellence for continued industry leadership in the production of Eog's existing homes.

Emily: Additionally, Meritage was also named to Newsweek's 2020 for Americas greatest companies list as our commitment to sustainability is recognized even outside of our sector.

Emily: Also take pride ensuring this diverse is there in the first quarter of this year. We received the President's volunteered service award assemble warranties Nobody U S President and the highest 1 billion R&R available for volunteerism, and we're going through our partnership with no child, Hungary, and the 1100 plus islands our team members volunteered T.

Emily: Package nearly 260000 meals over the past few years to fight childhood hunger.

Emily: Lastly, this quarter, we were recognized as one of Forbes 2024, most successful mid cap companies based on sales and earnings growth return on equity and total stock return for the last five years.

Emily: And Meritage, we believe the financial achievements must be maintained while maintaining a focus on responsible responsible corporate citizens.

And we are honored that these accolades continue hold strength, the breadth and depth of our commitment.

With that I'll now turn it over to Felipe thank.

Thank you Steve this quarter, we are excited to share our financial results, but I wanted to provide a bit more context behind the numbers.

Felipe: 50% of our quarterly deliveries are sold and closed intra quarter.

Felipe: <unk> has been increasing for the last three to four quarters, resulting in a record backlog conversion of 138%.

Felipe: This conversion rate is materially north of our previous long term target of 80%, 80%, plus and notably higher than even our fourth quarter 2020 through backlog conversion of 110%, helping drive improved ROE over the last several quarters.

Successful is the intentional result of migrating to a move in ready strategy cost both our entry level and first in robotics, allowing us to enter the year with a sufficient supply of homes available for quick closed, particularly in advance of the spring selling season.

Felipe: We were able to both increase prices and offer less financing incentives than we anticipated and those quick moving closing on those quick moving closing meaningfully improving our first quarter 2020 for gross margin.

Emily: With our inter quarter sales activity, representing half of the quarter's closing volume our gross margin reflects more current market conditions in real time, and our outperformance validates that our move in ready strategy strategy is the right one for Meritage and for our customers.

Emily: Now turning to slide five demand remained solid this quarter, our sales orders of 3991 homes were up 14% year over year.

The nationwide sales event, we conducted in late January and into February was highly successful.

We sold our highest quarterly sales order volumes, which benefited from an 8% cancellation rate.

Emily: Below our historical average in the mid teens.

Entry level homes comprise more than 90% of the total order volume.

Emily: ASTM orders this quarter of 409000 was down 5% from prior year.

Emily: Earlier lines sequentially from the fourth quarter of 2023.

Emily: <unk> decrease from 2000 2030 was due to both a larger mix of our closings come from coming from our eastern markets and product mix shift even as we increased pricing in about half of our communities and use fewer rate locks at quarter.

Our first quarter 2024 outages orphan pace of $4 nine per market improved from $4 two in the prior year and was well above four net sales provided due to the strength of the spring demand.

Emily: First quarter 2020 for any community count to be 75 was up 2% sequentially from the fourth quarter of 2023 and down 1% compared to prior year 34, New can you came online. This quarter. We are still on target for more material community count growth later in the year ending 2020 for mid to high single digits higher than where we started with <unk>.

Either even greater projected growth in 2025.

We already control all blocks, we need for planting the openings in 2024 as well as most of our 2025 communities. We are now focused on opportunities for quick openings in 2025, as well as longer term growth into 2026 and beyond.

Moving to the retail level trends on slide six.

Emily: All of our regions generate a sales pace well above $4 per.

Emily: During the first quarter timeframe for although we do expect Q1 to be one of our strongest absorption quarter as it overlaps with the spring selling season Sn.

Emily: The Central region, combined Texas markets at both the highest retail average absorption pace of $5 two sales per month, and our backlog conversion rate of over 150% economic growth in taxes feels the positive momentum in the housing market and with over 90% of this region's outage can you being entry level, a steady supply of affordable and move in ready inventory has.

Emily: Been in high demand.

The West region have average absorption pace of four eight net sales per month compared to $4 five last year I previously challenged markets in this region regain sales momentum this quarter, primarily in Arizona and Colorado some of the toughest markets last year.

Our first quarter 2024 sales order volume increased double digits on a year over year basis on a reduced Canadian county.

The east region experienced the largest year over year growth and the added average absorption pace of four points at the net sales per month up from $3 eight from last year.

As we have been focused on rebalancing our land portfolio over the last couple of years, our operating each regions are now visible with a 10% year over year growth in average communities and double the prior year stack inventory, which positions us well to continue to take market share in the high growth markets parts of this country.

Now turning to slide seven.

Our quarterly starts were approximately 4000 homes in the first quarter of 2024, we were up from about 2500 in the prior year and are consistent with our quarterly cadence for the last few quarters.

In order to ensure we have sufficient homes available for quick move in we align I start take with our expected future sales pace further as you grow community count in the later half of this year, we will start more homes to meet our targeted per key new vendor Maggie supply across our growing footprint.

Emily: We had approximately 6000 spec homes in inventory as of March 31, 2024.

54% from about 3900 stacks as of March 31, 2023, but only about 100 homes greater than where we started this quarter.

This represents 22 stacks per community quarter, which equates to $4 five months supply of specs on the ground well within our target level of four to six months of supply.

Emily: With our home closings this quarter, 93% came from previously started inventory.

Emily: From 87% in the prior year.

80% of the total tax were completed as of March 31st point for <unk> as we continue to make progress toward our targeted run rate of the carrying one third move in ready homes.

Our ending backlog as of March 31, 2024 totaled approximately 3000 homes down from about 3900 homes in the prior year as our inter quarter sales to closing percentage increased.

With our focus on carrying more move in ready inventory, we would expect our backlog will continue to represent less than one quarter sales as our backlog conversion rate start to existing perform above 100% improving our returns.

Emily: With our backlog and specs on the ground totaling over 9000 homes. We believe we have the optimal level of home supply to deadlock deliver on our full year results.

I will now turn it over to Hela to walk you through our financial results.

Hela: Thank you Felipe.

If I cover our financial highlights I wanted to first address the momentum we've gained with our land calls legal system a key pillar.

Our land teams have been successful first analysis type of computing on land and land market and these are efforts, we put nearly 6300 net new lots under control this quarter, reflecting the growth in our total lot count by nearly 10% year over year and up sequentially by 3% to approximately $66400.

We're starting to increase our use of off balance sheet financing growing.

Turning to 31% this quarter from 25% in the first part of 2023 and 28% from Q4 of last year, we continue to be focused on accelerating our land acquisition.

Opportunities, while maintaining a healthy balance sheet now, let's turn to slide eight and cover our Q1 financial results in more detail.

First quarter 2020 for home closing revenue was $1 5 billion, reflecting 21% higher home closing volume year over year and was partially offset by 4% lower ASP English shift in product mix and a sequential basis.

S T and clothing increase in the first quarter of 2020 for us if we do see utilization and rate locks and permanent price increases reflected in our interim quarter sales, including as the market improved over the last 90 days, assuming interest rates hold steady or improve and keep the rest of the year is expected to be fairly consistent and some reductions from geographic.

Next our new entry level communities opening with our prices will be balanced by reduced financing incentive costs and price increases where the market can absorb that.

Utilization of rail access slowed from 2002 and 2023 are all in discounts are still running at an elevated level and we expect to continue to utilize rate locks and buy down can we gain concerns around rate volatility.

Gross margin increased 340 bps to 25, 8% in the first quarter of 2024 compared to 22, 1% in the prior year. This improvement is a combination of several factors first the reduced utilization of green financing incentives and we've discussed next greener and buy rates are fixed costs.

Higher revenue and finally improvements in our direct cost as last year's first quarter marked the highest per square footage or express since it started to convey these savings were partially offset by higher lot costs.

We wanted to take a minute and cover the trends, we're seeing non direct costs.

Operator: BF-WATCH TV 2021 Hello, and welcome to the Meritage Homes first quarter 2024 analyst call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. The caller may be placed into the question queue at any time by pressing star 1 on your telephone keypad.

Our teams have been leveraging our spec strategy and increasing value, allowing us to deepen our relationships with our vendors for part of the reductions cheapskate unexpected will be able to hold the line steady.

Operator: Study findings.

Operator: Lumber increases on the labor side capacity fairly studies, perhaps is not banking on the constructions has pulled back a base, creating a stable environment residential construction and Tommy our cycle times have settled in at around 140 calendar days over the last three quarters, we remain disciplined in our start cadence and are only buying homes.

Operator: As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Emily Tadano, Vice President, Investor Relations and ESG. Please go ahead, Emily.

Emily Tadano: Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2024 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. Please refer to slide 2, cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward-looking statements.

Emily Tadano: During the construction process to have the necessary inventory for quick move in closing our goal is to turn our assets three times a year to get their additional capacity will likely be needed for both trade labor and local government staffing for permitting and inspections.

Emily Tadano: Let me review the composition of our gross margin the only non variable costs since the land acquisition and development.

Emily Tadano: 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. Furthermore, any forward-looking statements are inherently uncertain. Our actual results may be materially different from 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 the Securities and Exchange Commission, specifically our 2023 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures.

Emily Tadano: Alright, Thanks Bank elevate Atlanta down in costs that impacted the entire industry over the past three years are now fully flowing through our financials as almost all of our land is now from post Covid acquisition. Our current guidance reflects the elevated loss costs.

Emily Tadano: Unexpected additional pullback on margins beyond 2020 for it go forward log costs have a similar land development composition component.

Emily Tadano: Over the past 46 quarters, our long term gross margin target has been at least 22% structurally we believe our target has changed as we continue to violate our relationships with national vendors and further streamline our operations. The goal of these efforts is to improve cycle times and reduce costs, even operating under extreme environments.

Emily Tadano: Several years high highly favorable and then very challenging as the markets are stabilizing are gaining a clear understanding of our capabilities in a normalized environment and expect to share our higher internal targets with you over the next several quarters turning to SG&A SG&A was 10, 4% of home closing revenue in the first.

Emily Tadano: With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, 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 later today. I'll now turn it over to Mr. Hilton.

Emily Tadano: Quarter of 2024, which was down in line with 10, 2% for the first quarter of 2023 higher commissions this quarter offset the incremental leverage achieved on higher home closing revenue we're still comfortable.

Steven J. Hilton: Thank you, Emily. Welcome to everyone listening in on our call. I will briefly discuss current market trends and our recent accomplishments. Phillippe will cover highlights of our operational performance and how our strategy is driving our success. HILO will provide a financial overview of the first quarter and our forward-looking guidance for Q2 and full year 24.

Steven J. Hilton: For the full year, SG&A angle of 10% or under and expect quarterly SG&A to improve throughout the year, given our anticipated volume growth over the next few years or longer term SG&A target is nine 5% and the.

Steven J. Hilton: Meritage had a remarkable start to the year. We achieved an average absorption pace of 4.9 sales per month in the first quarter of 2024, which resulted in our highest quarterly sales orders totaling 3,991 homes. During the spring selling season, with a healthy supply of move-in ready inventory, we were able to capitalize on strong market conditions generated by the increasing need for housing for Millennials and Gen Zs, as well as the move-down day boomers who continue to find our limited inventory, and limited availability of resale housing supply.

Steven J. Hilton: First quarter of 2024 financial services loss of approximately $700000 included $5 8 million in write offs related to rate lock unwind costs. This compares to a financial services profits of $2 9 million in the first quarter of 2023 and had $1 9 million in similar write offs, we anticipate potential.

Steven J. Hilton: Incurring another $7 million of rate online cost in the second quarter, which is included in our guidance. Excluding these charges the profitability of our financial services. It falls in line with our historical averages the.

Steven J. Hilton: In the first quarter of this year, our record backlog conversion of 138% drove 3,507 home deliveries, which led to home closing revenue of $1.5 billion. The home closing growth margin for the quarter was 25.8%, which combined with SG&A of 10.4% resulted in diluted EPS of $5.06.

Steven J. Hilton: The first quarter's effective income tax rate was 25% this year essentially flat to prior year with both periods benefited from energy tax credits and qualifying homes under the inflation reduction Act overall higher home closing revenue and gross profit, but slight SG&A leverage and tax rate led to a 43% year over year increase in <unk>.

Steven J. Hilton: First quarter 2000, twenty's like diluted EPS to $5.06 from $3.54 in 2023.

Steven J. Hilton: As of March 31st, 2024, we increased our book value per share 17% year over year to $129.98 and generated a return on equity of 18%. Although visibility into what interest rates and mortgage rates will do for the remainder of the year remains unclear, we believe that by satisfying homebuyers' desire to have quick closing timelines, our available inventory should position us to continue increasing our market share. Now on to slide four for our recent milestones.

Steven J. Hilton: Before we move to the balance sheet I wanted to cover our Q1 2020 for our customers' credit metrics as expected our buyer profile remains relatively consistent with our historical averages with FICO scores and your second 40, and DTI is around 41 or 42 LTV, we're still in the mid eighties and about 80% of our buyers in Q1.

Steven J. Hilton: Some sort of financing incentives consistent with our mortgage company capture rate.

Steven J. Hilton: Now turning to slide nine.

Steven J. Hilton: It's very timely that during the month that we celebrate Earth Day, we can announce Meritage's 11th award at the EPA's Energy Star Partner of the Year, for sustained excellence, for continued industry leadership in the production of energy-efficient homes. Additionally, Meritage was also named to Newsweek's 2024 America's Greenest Companies list, as our commitment to sustainability is recognized even outside of our sector. I also take pride in sharing that in the first quarter of this year, Meritage received the President's Volunteer Service Award, a silver award bestowed by the U.S. President and the highest civilian honor available for volunteerism.

Steven J. Hilton: Our balance sheet returns and liquidity management, our core focus for US we have nothing drawn under our credit facility cash of $905 million and net debt to cap of 2% at March 31 2024.

Steven J. Hilton: That does it cap ceiling target in 'twenty, leveraging our improving backlog conversion.

Steven J. Hilton: Also generated $82 million in operating cash flow for the first quarter of 2024.

Steven J. Hilton: Over arching capital spend philosophy looks to generate long term shareholder value expansion through both growth in business and returning capital to shareholders. Since early 2023, we have been accelerating our investment in organic growth this quarter and $430 million on land acquisition and development, which was up 30.

Steven J. Hilton: It was earned through our partnership with No Child Hungry and the 1,100-plus hours our team members have volunteered to package nearly 260,000 meals over the past two years to fight childhood hunger. Last of this quarter, we were recognized as one of Forbes 2024 Most Successful Mid-Cap Companies based on sales and earnings growth, return on equity, and total stock return for the last five years. At Meritage, we believe that financial achievements must be maintained while maintaining a focus on responsible corporate citizenship, and we are honored that these accolades continue to illustrate the breadth and depth of our commitment. With that, I'll now turn it over to Phillippe.

Phillippe: 9% from prior year, we expect our go forward transfered full year 2024, and beyond total Q2, $2 5 billion of land spend given confidence in our business model and our ability to deliver strong and stable financial performance. During the first quarter of 2024 meaningfully enhance our shareholder returns directed as well.

Phillippe: Barry we instituted a formal programmatic share repurchase plan with the minimum buyback commitment of $15 million in each quarter to provide consistency and predictability to our share repurchase activity. During the first quarter of 2024 might be honestly cannot exist $10 million commitment and Opportunistically bought back an additional 41.

Phillippe Lord: Thank you, Steve. This quarter, we are excited to share our financial results, but I wanted to provide a bit more context behind the numbers. Nearly 50% of our quarterly deliveries were sold and closed interquarter, a trend that has been increasing for the last three to four quarters, resulting in a record backlog conversion of 138%. This conversion rate is notably higher than even our fourth quarter 2023 backlog conversion of 110%, helping drive improved ROE over the last several quarters.

Phillippe: We repurchased over 360000 shares or 1% of common stock outstanding at December 31, 2023 for $56 million this quarter $129 million remaining available under our authorization program.

Phillippe Lord: One year after initiating our dividend policy, we nearly tripled our quarterly cash dividends of 75 cents per share in this quarter from 27 cents per share providing another avenue for us to improve our RV. This resulted in total spend of about $27 million in dividends in the first quarter this year and rounding out our capital plan for the year well also.

Phillippe Lord: This success was the intentional result of migrating to a move-in-ready strategy across both our entry-level and first U.S. products, allowing us to enter the year with a sufficient supply of homes available for quick close, particularly in advance of the spring selling season. We were able to both increase prices and offer fewer financing incentives than we anticipated on those quick move-in closings, meaningfully improving our first quarter 2024 gross margin. With our inter-quarter sales activity representing half of the quarter's closing volume, our gross margin reflects more current market conditions in real time, and our outperformance validates that our move-in-ready strategy is the right one for Meritage and for our customers.

Phillippe Lord: Any near term opportunities to address the senior debt that's coming due in early 2025 on slide 10.

Phillippe Lord: In the first quarter of 2024.

Phillippe Lord: Despite unsecured land deals that meet our underwriting standards and the majority of our markets meaningfully putting more lots under control and home starts. It's nearly 6300 net new lots under control. This quarter represented an estimated 43 future can be.

Phillippe Lord: At about 200 lots under control in the first quarter of 2023, and we were only starting to ramp up from the pull back in late 2022 that quarter.

Phillippe Lord: As of March 31, 2024, we owned or controlled a total of about 66400 loss equating to four six years supply of lots in mind with our target.

Phillippe Lord: Demand remained solid this quarter. Our sales orders of 3,991 homes were up 14% year-over-year. The nationwide sales event we conducted in late January and into February was highly successful. We sold our highest quarterly sales order volume, which benefited from an 8% cancellation rate, significantly below our historical average in the mid-teens. Entry-level homes comprised more than 90% of the total's order volume. AST on orders this quarter of $409,000 was down 5% from the prior year, but fairly in line sequentially from the fourth quarter of 2023.

Phillippe Lord: Five year supply.

Phillippe Lord: And financing strategy focuses on managing our capital, obviously mindful of balance sheet metrics and margin goals, even able to utilize our healthy balance sheet to replenish our land portfolio, while minimizing the gross margin impact from actual land deals for the past several years as we mentioned earlier, we have recently been utilizing more option financing for our land purchases.

Phillippe Lord: About 69% of.

Phillippe Lord: Total inventory at March 31, 2024 was tons and 31% options compared to prior year or 175% owned inventory and a 25% option lot position, we believe that offerings enhancing will allow us to control more land and increase our year supply of lots beyond that we like our balance sheet to absorb.

Phillippe Lord: The ASP decrease from 2020-2030 was due to both a larger mix of our closings coming from our Eastern markets and a product mix shift, even as we increased pricing in about half of our communities and used fewer RELOCs this quarter. The first quarter 2024 average absorption pace of 4.9 per month improved from 4.2 in the prior year and was well above 4 net sales per month due to the strength of spring demand. The first quarter of 2024 ending community count of 275 was up 2% sequentially from the fourth quarter of 2023 and down 1% compared to the prior year. 34 new communities came online this quarter.

Phillippe Lord: Our intent is to accelerate our growth into 2025 and onwards, and we're currently working on four main financing opportunities and we hope to be able to share with you in the next several quarters. Finally, I'll direct you to slide 11 for our guidance given the robust market conditions in our supply of move in many homes, we revise our projections upward for full year 2024 to the following.

Phillippe Lord: We are still on target for more material community count growth later in the year, ending 2024 mid to high single digits higher than where we started with even greater projected growth in 2025. We own and control all the lots we need for planned community openings in 2024, as well as most of our 2025 communities. We are now focused on opportunities for quick openings in 2025, as well as longer-term growth into 2026 and beyond.

Phillippe Lord: Total closings between 14000 515000 units home closing revenue of six to $6 2 billion home closing gross margin of around 24, 5% to 25% and effective tax rate was about 22, 5% and diluted EPS in the range of $19 27 to $20.

Phillippe Lord: E.

Phillippe Lord: As for Q2 2024.

Phillippe Lord: <unk> total earnings between 36 and 3800 units.

Phillippe Lord: Moving to the regional level, trends on slide six, all of our regions generated a sales pace well above 4.0 in sales per month during the first quarter of 2024. We do expect Q1 to be one of our strongest absorption quarters as it overlaps with the spring calendar season.

Phillippe Lord: <unk> revenue of $1 five to $1 6 billion home closing gross margin of 25% to 25% an effective tax rate of about 22, 5%.

Phillippe Lord: EPS in the range of $4 72.

Phillippe Lord: The central region comprising our Texas markets had both the highest regional average absorption pace of 5.2 sales per month and a backlog conversion rate of over 150 percent. Economic growth in Texas fuels the positive momentum in the housing market, and with over 90 percent of this region's average community being entry-level, a steady supply of affordable and move-in-ready inventory has been in high demand. The West region had an average absorption pace of 4.8 net sales per month, compared to 4.5 last year.

Phillippe Lord: To $5 30.

Phillippe Lord: Both Q2 and full year guidance assume current marketing conditions and interest rates, we will continue to refine our guidance as additional clarity around interest rates becomes available later in the year with that I'll.

Speaker Change: I'll turn it back over to <unk>. Thank you you have to.

Phillippe Lord: To summarize on slide 12, our first quarter 2024 results demonstrate that our ample spec home supply for quick closings and our focus on pace over price allow this surplus out and exceeded not only our volume targets, but also our gross margin guidance as we increase our community count in the second half. This year. We believe we are positioned to continue growing our market share.

Phillippe Lord: A previously challenged market in this region regained sales momentum this quarter, primarily in Arizona and Colorado, some of the toughest markets last year. Colorado's first quarter 2024 sales order volume increased double digits on a year-over-year basis on a reduced community cap. Each region experienced the largest year-over-year growth and an average absorption pace of 4.7 net sales per month, up from 3.8 last year. As we have been focused on rebalancing our land portfolio over the last couple of years, our effort in these regions is now visible, with a 10% year-over-year growth in average communities and double the prior year spec inventory, which positions us well to continue to take market share in the high-growth markets parts Now turning to slide seven.

Phillippe Lord: Further our acceleration on both land spend as well as share repurchases and dividend demonstrates our confidence in our business model. We are committed to balancing growth in the business and returning cash to shareholders in order to continue creating long term value.

Speaker Change: That I will now turn the call over to the operator for instructions on the Q&A operator.

Speaker Change: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad. We ask you. Please ask one question and one follow up then return to the queue. If he like to remove your question from the queue. Please press star two once again Thats star one to be placed in the question queue and we ask you. Please ask one.

Phillippe Lord: Our quarterly starts were approximately 4,000 homes in the first quarter of 2024. This was up from about 2,500 in the prior year and is consistent with our quarterly cadence for the last three quarters. In order to ensure we have sufficient homes available for quick move-in, we align our start pace with our expected future sales pace. Further, as we grow the community count in the latter half of this year, we will start more homes to meet our targeted per-community move-in ready supply across our growing footprint.

Phillippe Lord: Question and one follow up then return to the queue. Our first question is coming from Stephen Kim from Evercore ISI. Your line is now live.

Speaker Change: Thanks, very much guys really impressive results. Thanks for all the guidance and color.

Speaker Change: Question for you regarding the backlog turnover ratio. This is something that we've chatted a lot about over the last year. It sounds like you're clearly now saying that you know you've arrived at a level at a point now with your business model, where you feel comfortable guiding to turnover ratio at triple digits.

Phillippe Lord: We had approximately 6,000 spec homes in inventory as of March 31st, 2024, up 54% from about 3,900 spec homes as of March 31st, 2023, but only about 100 homes greater than where we started this quarter. This represents 22 spec homes per community supporter, which equates to 4.5 months supply of spec homes on the ground, well within our target level of four to six months of supply.

Speaker Change: I was curious as to whether you think that when what you see this year in terms of how you're planning to operate whether this is a level of backlog turnover ratio that you also thing can continue.

Phillippe Lord: It's sort of as you progress towards whatever your long term normalized level. This is this the new normal or do you see 2024, as maybe being a little higher than normal.

Hilla Sferruzza: Of our home closings this quarter, 93% came from previously started inventory, up from 87% in the prior year. Additionally, 22% of the total stacks were completed as of March 31, 2024, as we continue to make progress to our targeted run rate of considering one-third move-in-ready homes. Our ending backlog, as of March 31st, 2024, totaled approximately 3,000 homes, down from about 3,900 homes in the prior year as our inter-quarter sales-to-closing percentage increased. With our focus on carrying more move-in ready inventory, we would expect our backlog will continue to represent less than one quarter of sales as our backlog converge rate starts to consistently perform above 100%, improving our return.

Speaker Change: I would say.

Hilla Sferruzza: That is pretty much going to be the new normal as we think about the rest of this year. We're modeling a similar backlog conversion for the remaining quarters. Some of it is just predicated on cycle time stability, which currently we have.

Hilla Sferruzza: The production capacity is really really good so as long as that remains in the same state that this is going to be the new normal for us.

Speaker Change: Yeah, and that's really great and I assume same.

Hilla Sferruzza: The same thing could probably be said for absorption rates, perhaps for per community, but maybe you can update us on that I know you historically I think you've talked about three to four.

Hilla Sferruzza: With our backlog of specifications on the ground totaling over 9,000 homes, we believe we have the optimal level of home supply to deliver on our full year results. I will now turn it over to Hilla to walk you through our financial results. Hilla? Thank you, Philippe.

Hilla Sferruzza: And then.

Hilla Sferruzza: As a follow on to that you know you talked about your gross margin now pretty much for this year incorporating a fully adjusted land costs. You know you don't have that pre pandemic unusual land effect. So.

Hilla Sferruzza: Before I cover our financial highlights, I wanted to first address the momentum we've gained with our land goals, as this has been a key pillar in our growth plan. Our land teams have been successful at sourcing deals despite the competitive land market, and through their efforts, we've put nearly 6,300 net new lots under control this quarter.

Hilla Sferruzza: That would seem to suggest that your gross margins.

Hilla Sferruzza: You don't have.

Hilla Sferruzza: Potentially some upside from here I know youre going to give us more on that later, but you had talked in the past about how a higher level of volume translates very directly for you into a higher level of profitability not just on the SG&A, but the gross margin. So I was wondering if you could remind me again about the sensitivity of higher volume.

Hilla Sferruzza: This led to their growth and our total lot count by nearly 10% year over year and up sequentially by 3% to approximately 66,400 lots. With these new deals, we're starting to increase our use of off-balance sheet financing, growing our off-book percentage to 31% this quarter, from 25% in the first quarter of 2023 and 28% from Q4 of last year. We continue to be focused on accelerating our land acquisitions and looking for off-book opportunities while maintaining a healthy balance sheet.

Hilla Sferruzza: To your gross margin as well as updating us on your absorption rate longer term.

Hilla Sferruzza: Now let's turn to slide 8 and cover our Q1 financial results in more detail. First quarter 2024 home closing revenue was $1.5 billion, reflecting 21% higher home closing volume year-over-year that was partially offset by 4% lower ASP due to a shift in product.

Hilla Sferruzza: On a sequential basis, ASPN closings increased in the first quarter of 2024 with reduced utilization of rate locks and targeted price increases reflected in our intra-quarter sales and closings as the market improved over the last 90 days. Assuming interest rates hold steady or improve, ASP for the rest of the year is expected to be fairly consistent with some reductions from geographic mix, and new entry-level communities opening with lower prices will be balanced by reduced financing, incentive costs, and price increases where the markets can absorb them.

Hilla Sferruzza: Finding really strong land positions out there to support that affordable price point, and we are evaluating whether we can do better than that four to five but stay tuned on that and I'll, let <unk> talk about the margin guidance.

Hilla Sferruzza: So historically and.

Hilla Sferruzza: When we had longer longer cycle times and lower clothing.

Hilla Sferruzza: Clothing time, they could be up to 100 deaths a pickup in the fixed component of gross margin between Q1, and Q4 I think any incremental volume now that's a little bit different these days, because we're selling the spring selling homes in Colombia.

Hilla Sferruzza: While the utilization of rate locks has slowed from 2022 and 2023, our almond discounts are still running at an elevated level, and we expect to continue to utilize rate locks and buy-downs to negate concerns around rate balance. Home closing gross margin increased 340 BPS to 25.8% in the first quarter of 2024, compared to 22.4% in the prior year. This improvement is a combination of several factors. First, the reduced utilization of rate lag financing incentives that we've discussed.

Hilla Sferruzza: As spring season home in the same quarter by increased volume for us, even four or 500 incremental.

Hilla Sferruzza: Units in a quarter it can have up to 100 and that improvement in our gross margin not just SG&A leverage.

Speaker Change: Great. That's really helpful. Thanks, Sheila Thanks, Felipe I appreciate it.

Hilla Sferruzza: Next, the greater leverage of fixed costs on higher revenue. And finally, improvements in our direct costs, as last year's first quarter marked the highest per square footage direct revenue for us since the start of COVID. These savings were partially offset by higher lot costs.

Speaker Change: Thank you.

Hilla Sferruzza: Thank you. Our next question today is coming from Alan Ratner from Zelman and Associates. Your line is now live.

Speaker Change: Hey, guys. Good morning, Congrats on a great quarter.

Speaker Change: First question gross margin. So if I look at your full year guide I think the biggest adjustment, which was sort of the margin range and.

Hilla Sferruzza: We want to take a minute and cover the trends we're seeing in our direct costs. Our team has been leveraging our spec strategy and increasing volume, allowing us to deepen our relationships with our vendors. We're proud of the reductions achieved to date, and we expect that we'll be able to hold the line to keep costs steady and find offsets to the recent lumber increases. On the labor front, capacity has held fairly steady, perhaps as multifamily construction has pulled back a bit, creating a stable environment for residential construction at the moment.

Hilla Sferruzza: Acting, but when you think about the macro environment today versus back then you know rates are higher and continuing to move higher so what is actually embedded in that guide for the remainder of the year as far as incentives do you expect to kind of continue the improvement you've seen in the first quarter or are you baking in any.

Hilla Sferruzza: Our cycle time has settled in at around 140 calendar days over the last three quarters. We remain disciplined in our starts and cadence and are only selling homes later in the construction process to have the necessary inventory for quick move-in closing. Our goal is to turn our assets three times a year. To get there, additional capacity will likely be needed for both trade labor and local government staffing for permitting and inspection.

Hilla Sferruzza: Potential for having to increase incentives as you get to the back half softer seasonal time of the year.

Hilla Sferruzza: When we review the composition of our gross margin, the only known variable is lot cost since the land acquisition and development dollars have already been spent. Elevated land development costs that have impacted the entire industry over the past three years are now fully flowing through our financials, as almost all of our land is now for post-COVID acquisitions. Our current guidance reflects the elevated lot cost, and we do not expect an additional pullback on margins beyond 2024, as go-forward lot costs have a similar land development composition component.

Hilla Sferruzza: We're still an elevated level of incentives compared to where we were pre 2022. So we're maintaining that level. There was a decent amount even with the pullback.

Hilla Sferruzza: In in an improving market conditions in Q1, it was still a decent amount <expletive>.

Hilla Sferruzza: Over the past four to six quarters, our long-term gross margin target has been at least 22 percent. Structurally, we believe our target has changed as we continue to dial in our relationships with national vendors and further streamline our operations. The goal of these efforts is to improve cycle time and reduce costs. We've been operating under extreme environments for the past several years, highly favorable and then very challenging.

Hilla Sferruzza: That shows that we have in our toolkit to a rate lock buy downs.

Hilla Sferruzza: And our rate locks just in general by the cost today is good.

Hilla Sferruzza: Going to be less expensive because of our ability to sell and close them quickly when modeling current marketing conditions, including what we're seeing in April which includes the uptake in the guidance that we provided to you yeah I'll just I'll give you an actor.

Hilla Sferruzza: As the markets stabilize, we are gaining a clearer understanding of our capabilities in a normalized environment and expect to share our higher internal targets with you over the next several quarters. Turning to SG&A, SG&A was 10.4% of home closing revenue in the first quarter of 2024, which was fairly in line with 10.3% for the first quarter of 2023. Higher commissions this quarter offset the incremental leverage achieved on higher home closing revenue.

Speaker Change: Question here, but because people have asked me about April.

Hilla Sferruzza: We're not needing to go out and increase our rate lock costs too.

Hilla Sferruzza: <unk> the customers for April.

Speaker Change: That's included in our guidance.

Hilla Sferruzza: Even in these elevated rate environments, we're able to move people into our move in ready inventory at about similar costs than we were in Q1, so it's all baked into our guidance.

Hilla Sferruzza: We are still comfortable with our full-year SG&A goal of 10% or under and expect quarterly SG&A to improve throughout the year. Given our anticipated volume growth over the next few years, our longer-term SG&A target is 9.5%. In the first quarter of 2024, the financial services loss of approximately $700,000 included $5.8 million in write-offs related to rate block unwind costs.

Speaker Change: Got it that's really helpful. Thank you for that added color.

Speaker Change: Second question I guess, just pointing to your slide 10, where you show the lot acquisition activity, which is very helpful to see so I know this is not a smooth number by any means but first quarter. It looks like it was down a little bit from the last couple of quarters in terms of dollar spent on both development and acquisition it looks like the community.

Hilla Sferruzza: This compares to financial services profits of $2.9 million in the first quarter of 2023 that had $1.9 million in similar write-offs. We anticipate potentially incurring another several million dollars of rate-locked online costs in the second quarter, which is included in our guidance. Excluding these charges, the profitability of our financial services is held in line with our historical averages. The first quarter's effective income tax rate was 20.5% this year, essentially flat to the prior year, with both periods benefiting from energy tax credits on qualifying homes under the Inflation Reduction Act.

Hilla Sferruzza: <unk> I guess acquisition was relatively steady, but yet youre tracking I guess below the two to $2 5 billion target for land spend year to date. So is that just a timing function or is there is it getting harder to find deals to pencil how should we think about that because I know, obviously, you're 25 community count growth is somewhat dependent on hitting that.

Hilla Sferruzza: That target.

Speaker Change: Yeah, Everything's going as planned and it's a little it's really just a timing thing.

Hilla Sferruzza: I think youll see that timing.

Hilla Sferruzza: Overall, higher home closing revenue and gross profit with flat SG&E leverage and tax rates led to a 43% year-over-year increase in first quarter 2024 diluted EPS to $5.06 from $3.54 in 2023. Before we move to the balance sheet, I wanted to cover our Q1 2024 customer's credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages, with FICO scores near 740 and DTIs around 41 or 42. LTVs were still in the mid-80s, and about 80% of our buyers in Q1 received some sort of financing incentive, consistent with our mortgage company cap. Now turning to slide 9.

Hilla Sferruzza: Reverse out here in Q2, and Q3, but navigate indicates.

Hilla Sferruzza: Anything around our ability to go acquire the lots we need.

Hilla Sferruzza: For 2006 and beyond.

Hilla Sferruzza: 34000, just in the quarter, while we grew our community count.

Hilla Sferruzza: Our balance sheet, returns, and liquidity management are a core focus for us. We have nothing drawn under a credit facility, cash of $905 million, and a net debt-to-cap of 2% at March 31, 2024. Our net debt-to-capital ceiling target is in the mid-20s, leveraging our improving backlog conversion. We also generated $82 million in operating cash flow for the first quarter of 2024.

Hilla Sferruzza: <unk> ability to find land that pendulum is definitely not the issue. It's just timing of when deals are closing.

Speaker Change: Great. That's really helpful. Thanks, a lot guys. Good luck.

Speaker Change: Thank you.

Speaker Change: Great. Thanks, very much congrats on the results.

Hilla Sferruzza: Our overarching capital spend philosophy looks to generate long-term shareholder value expansion through both growth in business and returning capital to shareholders. Since early 2023, we have been accelerating our investment in organic growth. This quarter, we spent $430 million on land acquisition and development, which was up 39% from the prior year. We expect our go-forward trend for full year 2024 and beyond to total $2 to $2.5 billion of land spend. Given confidence in our business model and our ability to deliver strong and stable financial performance, during the first quarter of 2024, we meaningfully enhanced our shareholder returns directive as well.

Hilla Sferruzza: This earlier in the call, but just what drove the actual upside in the first quarter versus prior guidance. You know I know I think part of the review that was early it was more just focused on year over year, but.

Hilla Sferruzza: Believe I heard correctly that you expect 25 gross margins to at minimum be similar to 24 and I just wanted to make sure you know that.

Hilla Sferruzza: In February, we instituted a formal programmatic share repurchase plan with a minimum buyback commitment of $15 million in each quarter to provide consistency and predictability to our share repurchase activity. However, during the first quarter of 2024, we went beyond the systematic $15 million commitment and opportunistically bought back an additional $41 million. We repurchased over 360,000 shares, or 1% of common stock outstanding at December 31st, 2023 for $56 million this quarter. $129 million remain available under our authorization program.

Speaker Change: I heard that correctly as well.

Speaker Change: Yeah, I'll, let USA.

Hilla Sferruzza: The second part.

Hilla Sferruzza: So as we came into Q1 and guided to our Q1 we.

Hilla Sferruzza: We had a we didn't have real visibility into the strength of the spring selling season. So it was early into January and obviously the spring selling season has been very very strong.

Speaker Change: So as.

Hilla Sferruzza: As you can see from our backlog conversion rate, we were able to convert a lot more move in ready inventory than we had initially assumed.

Hilla Sferruzza: One year after initiating our dividend policy, we nearly tripled our quarterly cash dividend to $0.75 per share this quarter from $0.27 per share, providing another avenue for us to improve our ROE. This resulted in a total spend of about $27 million on dividends in the first quarter this year. And rounding out our capital plan for the year, we're also evaluating near-term opportunities to address the senior debt that's coming due in early 2025. Now on to slide 10.

Hilla Sferruzza: And the demand for that move in ready inventory was really strong. So we were able to take pricing and we didn't need to use.

Hilla Sferruzza: As much of the rate lock.

Hilla Sferruzza: Dollars, we had in our assumptions to get people into those mortgages and then some of them.

Hilla Sferruzza: We obviously had assume that rate locks were still going to be.

Hilla Sferruzza: Heavily utilized coming into the year.

Hilla Sferruzza: In the first quarter of 2024, we were able to find and secure land deals that meet our underwriting standards in the majority of our markets, meaningfully putting more lots under control than home starts. The nearly 6,300 net new lots under control this quarter represent an estimated 43 future communities. We put about 200 net new lots under control in the first quarter of 2023, as we were only starting to ramp up from the pullback in late 2022 that quarter.

Hilla Sferruzza: They were much less utilized so between backlog conversion and more leverage.

Hilla Sferruzza: ASP improvement and then less incentive utilization, obviously, we had a beat on our margin guide and then I'll, let <unk> talk about the guidance for 25, yet so we're not providing guidance for 'twenty five we just wanted to clarify we heard that there was maybe some confusion.

Hilla Sferruzza: As of March 31st, 2024, we owned or controlled a total of about 56,400 lots, equating to a 4.6 year supply of lots in line with our target of a 4 to 5 year supply. Our land financing strategy focuses on managing our capital while being mindful of balance sheet metrics and margin goals. We've been able to utilize a healthy balance sheet to replenish our land portfolio while minimizing the gross margin impact from option land deals for the past several years.

Hilla Sferruzza: About the composition of our lot cost that's flowing through the financials and 2024, if it was going to be a little bit annoying from the higher land development cost in 'twenty four and some also coming in 'twenty five and we just wanted to clarify that pretty much everything that's running through our financials. These days is fully baked in at the higher land development spend we don't have anymore.

Hilla Sferruzza: Any more pre Covid land.

Hilla Sferruzza: For us that that level of lot costs as a percentage of revenue that you're seeing in our numbers in 'twenty four that's the new run rate until land development cost has come down so theres not another shoe to drop with another reduction Q gross margin from land, we've not given guidance on any of their control.

Hilla Sferruzza: As we mentioned earlier, we've recently been utilizing more option financing for our land purchases. About 69% of total lot inventory at March 31st, 2024 was owned and 31% optioned compared to the prior year, where we had a 75% owned inventory and a 25% option lot position.

Hilla Sferruzza: Yes.

Hilla Sferruzza: Gross margin into 2025, just quite yet.

Hilla Sferruzza: Okay.

Speaker Change: Appreciate that and then I guess, maybe just I'll also good looking forward.

Hilla Sferruzza: We believe that off-balance sheet financing will allow us to control more land and increase our year supply of lots beyond what we'd like our balance sheet to absorb. Our intent is to accelerate our growth into 2025 and onward, and we're currently working on some land financing opportunities that we hope to be able to share with you in the next several quarters. Finally, I'll direct you to slide 11 for our guidance.

Hilla Sferruzza: You've kind of talked consistently about an accelerated rate of growth in 'twenty five and beyond you're obviously looking for you know mid to high single digits. This year.

Hilla Sferruzza: You know without getting into too many details I mean.

Phillippe Lord: Given the robust market conditions and our supply of new and ready homes, we've revised our projections upward for full year 2024 to the following: total closings between 14,500 and 15,000 units, home closing revenue of 6 to 6.2 billion, home closing gross margin of around 24.5 to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $19.20 to $20.70. As for Q2 2024, we are projecting total closings between 36 and 3,800 units, home closing revenue of $1.5 to $1.6 billion, home closing gross margin of 24.5 to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $4.70 to $5.30.

Phillippe Lord: My impression of higher growth would be something in it.

Phillippe Lord: More in the you know.

Phillippe Lord: Low double digit range at minimum and I'm just curious if that's the right way to think about that or could it even be something in the teens just trying to get a degree of magnitude when you talked about accelerated growth.

Speaker Change: You're talking about for 2025.

Phillippe Lord: Yeah.

Phillippe Lord: Give any guidance on 2025, but we're buying a lot of land.

Phillippe Lord: And anything less than 10% isn't really what we're targeting either but we're just not prepared to guide.

Phillippe Lord: To that to that at this point.

Speaker Change: Okay fair enough appreciate it thank you.

Phillippe Lord: Thank you. Your next question is coming from John Lovallo from UBS. Your line is now live.

Phillippe Lord: Both Q2 and full-year guidance assume current marketing conditions and interest rates. We will continue to refine our guidance as additional clarity around interest rates becomes available later in the year. With that, I'll turn it back over to Phillippe.

Phillippe Lord: Hey, guys. Thank you for taking my questions.

Phillippe Lord: The first one is you know not to get nitpicky, but if we look at the midpoint of the of the 'twenty 'twenty four delivery outlook, It's 14000, and 750 homes and if we back out the first quarter deliveries of $35 seven and then the second quarter midpoint midpoint, sorry of 3700.

Phillippe Lord: To summarize on slide 12, our first quarter 2024 results demonstrate that our ample spec homes supplied for quick closings and our focus on pace over pricing allowed us to plus up and exceed not only our volume targets but also our gross margin guidance. As we increase our community count in the second half of this year, we believe we are positioned to continue growing our market share. Further, our acceleration on both land spend as well as share repurchases and dividends demonstrate our confidence in our business model.

Phillippe Lord: We are committed to balancing growth in the business and returning cash to shareholders in order to continue creating long-term value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Phillippe Lord: And in the pipeline or is there something else that may be kind of leveling that that growth off.

Speaker Change: Yeah. So that's a great plan I'm glad that you need at things John So I.

Operator: Thank you, and now for the Conducneo question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. We ask you please ask one question and one follow-up, then return to the queue. If you'd like to remove your question from the queue, please press star 2. Once again, that's Star 1 to be placed in the question queue, and we ask you please ask one question and one follow-up, then return to the queue. Our first question is from Steven Kim from Evercore ISI. Your line is now active.

Speaker Change: I think we alluded to it a little bit but may be legit put a fine point on it I'll start and Felipe can take us from there.

Stephen Kim: When you're selling and closing homes in the same period of the spring selling season results get pulled out so before Q4, but kind of our huge quarter, where what we were selling through may got delivered Q and a half quarters later, because we're now buying because we're not where we're selling and closing intra quarter.

Stephen Kim: You're seeing that seeing fantastic value just come up earlier into the year, it's still going to be a good Q4, but it's not really reflecting the spring selling season homes anymore, let's leaps in Venezuela, Yes, that's right I mean, we expect.

Stephen Kim: Thanks very much, guys. Really impressive results. Thanks for all the guidance and color. I have a question for you regarding the backlog turnover ratio. This is something that we've chatted a lot about over the last year. It sounds like you're clearly now saying that you've arrived at a level, at a point now with your business model where you feel comfortable guiding it to a turnover ratio of triple digits. I was curious as to whether you think that what you see this year in terms of how you're planning to operate, whether this is a level of backlog turnover ratio that you also think can continue sort of as you progress towards whatever your long-term normalized level is. Is this the new normal, or do you see 2024 as maybe being a little higher than normal?

Speaker Change: But we.

Speaker Change: We will now see Q2, and Q3 being our biggest volume quarters with Q4 being a little more modest and then Q1, just depending on the spring selling season. So that's a.

Speaker Change: Yes that makes a lot of sense. Okay. And then you guys returned 83 million back to shareholders in the first quarter generated a similar level of cash from operations I mean, as we move forward here can we sort of think of matching cash flow with repos in dividends over the next few quarters, particularly considering no real debt due until 2020.

Phillippe Lord: I would say that this is pretty much going to be the new normal. As we think about the rest of this year, we're modeling a similar backlog conversion for the remaining quarters. Some of it's just predicated on cycle time stability, which we currently have. The production capacity is really, really good. So as long as that remains in the same state, this is going to be the new normal for us.

Phillippe Lord: Five.

Phillippe Lord: Yes.

Stephen Kim: Yeah, and that's really great, and I assume the same thing could probably be said for absorption rates, perhaps, per community, but maybe you can update us on that. I know historically, you know, I think you've talked about three to four. And then, as a follow-on to that, you talked about your gross margin now pretty much for this year, incorporating a fully adjusted land cost. You know, you don't have that pre-pandemic unusual land effect.

Stephen Kim: Return to shareholders, a return of capital to shareholders that that's kind of more of our target rather than a minute.

Speaker Change: Understood. Thanks, very much guys.

Speaker Change: Thank you.

Speaker Change: Thank you good afternoon, everyone.

Phillippe Lord: So that would seem to suggest that your gross margins, you know, potentially have some upside from here. I know you're going to give us more on that later, but you have talked in the past about how a higher level of volume translates very directly for you into a higher level of profitability, not just on the SG&A but the gross margin. So I was wondering if you could remind me again about the sensitivity of higher volume to your gross margin, as well as update us on your absorption rate in the longer term.

Stephen Kim: My first question is you know you've commented on me the target of taking the Asps down over time and the Guy doesn't imply that sequentially, we will see a bit of a slowdown in there, but I guess when you think about that relative to the pricing power and the level of demand that you talked to on the ground. How are you thinking about those two factors coming together.

Phillippe Lord: Sure.

Speaker Change: Yes, the ASP.

Phillippe Lord: Our forward looking ASP guidance is predicated on the land revived so for buying less extensive loss that can allow us to position our product in a more affordable part of the market long term, which is what our core strategy is that's driving the ASP decline.

Phillippe Lord: Yeah, I'll take the absorption question, and then I'll hand it over to Hilla on the margin guidance. We obviously believe we're going to sell more houses in the front half of the year than the back half of the year just due to seasonal trends. But we are reevaluating our overall absorption targets specifically for our entry-level business. We've often said that our target is around 4 to 5 for entry-level and somewhere between 3 and 4 for 1MU.

Speaker Change: Decline, but that doesn't mean, we're not taking pricing when the market is elastic.

Hilla Sferruzza: And that affordable segment of the market, which which it has been and was very strong in Q1. So they are two different concepts.

Phillippe Lord: And the affordable part of the market is extremely strong. We're finding really strong land positions out there to support that affordable price point. And we are evaluating whether we can do better than that 4 to 5. But stay tuned on that, and I'll let Hilla talk about the margin guidance.

Phillippe Lord: One is the land, we're buying and the other is what the market allows us to do.

Hilla Sferruzza: Okay, alright that makes sense.

Hilla Sferruzza: And then I guess can you just comment a bit on what you're seeing in terms of just overall cycle times and input costs in terms of some of the sticks and bricks in anything there as we think about the forward quarters.

Hilla Sferruzza: Sure. Historically, when we have longer cycle times and lower closing, set the closing time, it could be up to 100 BIPs pickup in the sixth component of gross margin between Q1 and Q4 due to the incremental volume. Now, that's a little bit different these days because we're selling spring selling homes and closing some of those spring season homes in the same quarter, but increased volume for us, even for 500 incremental units in a quarter, can have up to 100 BIP improvement in our gross margin, not just SG&A leverage.

Hilla Sferruzza: Yes, <unk> said in her opening comments cycle times are the best they've been in a long time, where kind of where our target is.

Hilla Sferruzza: Production capacity is really stable.

Hilla Sferruzza: Hitting our timelines I'm not sure how much more there is but but capacity is withdrawn so theres more to take out of our cycle times as well and then direct costs are also really quite.

Hilla Sferruzza: Quite stable we have.

Hilla Sferruzza: Given the size of our business at the point, we have really strong relationships that are produced some great cost structure for us lumbers ticked up a little bit, but we've been able to offset that in other areas in the categories of the business. So as we look out into 2024, we're modeling stable cycle times and stable direct costs.

Stephen Kim: Great! That's really helpful.

Stephen Kim: Thanks, Hilla. Thanks, Phillippe. I appreciate it.

Alan S. Ratner: Thank you. The next question today is coming from Alan Ratner from Zellman & Associates. Your line is now live.

Speaker Change: Okay, Alright, that's great color. Thank you and good luck with everything.

Alan S. Ratner: Hey guys, good morning.

Alan S. Ratner: Thank you.

Alan S. Ratner: Congratulations on a great quarter. First question: gross margin. So, you know, if I look at your full-year guide, I think, you know, the biggest adjustment was to the margin range. And, you know, if I think back to three months ago when you gave that, I believe, if I'm remembering correctly, obviously, higher land costs flowing through were kind of the main headwind as far as your expectation for some pressure through the year.

Alan S. Ratner: Thank you. Our next question today is coming from Alex Barron from housing Research Center. Your line is now live.

Speaker Change: Yes. Thank you.

Speaker Change: I was hoping you guys could.

Alan S. Ratner: Elaborating a little bit on on your average buyer well first of all what percentage of the buyers are actually first time buyers and what does that average buyer entry level buyer look like like what's their FICO what's there.

Alan S. Ratner: But I think you probably also had some assumptions about incentives embedded within that as well. And clearly, the first quarter came in better than, I guess, you guys were expecting. But when you think about the macro environment today versus back then, rates are higher and continuing to move higher. So, what is actually embedded in that guide for the remainder of the year as far as incentives is concerned? Do you expect to kind of continue the improvement you've seen in the first quarter? Or are you baking in any, you know, potential for having to increase incentives as you get to the back half of the year, which is a softer seasonal time of the year?

Alan S. Ratner: Our down payment and what their average income that type of thing.

Alan S. Ratner: You lose out on some more details for you. So just give us one second but I'll reiterate.

Speaker Change: Reiterate what <unk> said earlier.

Alan S. Ratner: Our FICO scores our DTI is everything is pretty much the same as it was it's been the same for a long time, we're obviously.

Alan S. Ratner: Targeting a more qualified entry level buyer.

Alan S. Ratner: But for the most part D var their first homes, but they have really high income levels.

Phillippe Lord: We're still at an elevated level of incentives compared to where we were, you know, pre-2022. So, we're maintaining that level.

Phillippe Lord: And they're looking for is nice at home as they can buy in a certain price point, but hang on one second and he will tell you. The exact metrics are first time.

Phillippe Lord: There was a decent amount, even with the pullback in improved market conditions in Q1, there was still a decent amount of incentives that were being used. But something that's really important to consider when you're selling and closing intra-quarter, even though you're offering an incentive, you can offer it much less expensively. If you're offering a 45-day interest rate lock, it's much cheaper than trying to buy a forward commitment. So, we're still planning on using the tools that we have in our toolkit through rate lock buy-downs and rate locks just in general. But the cost for those is going to be less expensive because of our ability to sell and close so quickly. So, we're modeling current market conditions, including what we're seeing in April, which

Phillippe Lord: So they don't declare themselves at the first time buyer economy back data and back into whether they're first time buyer or not but our first time buyer is about two thirds of our business right now.

Phillippe Lord: Okay.

Phillippe Lord: Okay.

Phillippe Lord: Interested just to see what type of income levels and these people have.

Speaker Change: Yeah, I don't know if we're sharing that the incumbent you can probably back into it because the Etfs are averaging 41 42, and we're sharing that their LTV is in the mid eighties that you kind of take our A&P back into what the loan amount is with an 85% LTV you can probably back into there Dan.

Phillippe Lord: Monthly average monthly income generally yeah.

Phillippe Lord: Yeah, I'll give you an extra question here because people are going to ask me about April. We don't need to go out and increase our rate lock costs to acquire customers for April. That's included in our guidance. Even in these elevated rate environments, we're able to move people into our move-in ready inventory at about similar costs than we were in Q1. So it's all baked into our guidance.

Phillippe Lord: Okay.

Speaker Change: Thank you.

Phillippe Lord: We're not seeing our particular consumer.

Phillippe Lord: Not be able to qualify and afford our home.

Phillippe Lord: We don't have to do right by downs and rate locks to qualify them. It's more of a psychological we want a lower rate on a 30 year mix.

Phillippe Lord: It's an incentive versus the qualification.

Speaker Change: Got it and then if you can elaborate on a comment you made about the cost of incentives being lower.

Alan S. Ratner: Got it. That's really helpful. Thank you for that added color.

Alan S. Ratner: Second question, I guess just pointing to your slide 10 where you show the lot acquisition activity, which is very helpful to see. So I know this is not a smooth number by any means, but the first quarter looks like it was down a little bit from the last couple of quarters in terms of dollars spent on both development and acquisition. It looks like the community's acquisition was relatively steady, but, you know, you're tracking, I guess, below the 2 to 2.5 billion target for land spend year to date.

Alan S. Ratner: Than a forward commitment if it was like a short close if.

Alan S. Ratner: If you can elaborate on that because my thought was that the forward commitment was supposed to be the lower for them.

Speaker Change: I'm sorry.

Alan S. Ratner: There's a lot we don't know.

Alan S. Ratner: Get into all that the dynamics of how far as claim networks. We can we can talk about that offline, but theres a lot of benefits using a forward commitment you can both buy and get some some locked in rate. It gives you an advantage that if rates are moving on during that period of time, you have that amount lockdown youre not trying to.

Alan S. Ratner: So is that just a timing function, or is there, you know, is it getting harder to find deals to pencil? How should we think about that? Because I know obviously your 25 community count growth is somewhat dependent on hitting that target.

Alan S. Ratner: On today's date.

Alan S. Ratner: We that we choose to do rate locks and also just regards your LLP Ada loan level price adjustments.

Phillippe Lord: Yeah, everything's going as planned. It's really just a timing thing. I think you'll see that timing reverse out here in Q2 and Q3, but none of it indicates anything about our ability to go acquire the lots we need for 26 and beyond. And we're also finding deals for 2025. So it's really all just timing.

Alan S. Ratner: Agnostic to what your own creditworthiness, However, if youre doing something spot rate for a short period of time.

Phillippe Lord: Have a good credit that's going to be cheaper. So we have an opportunity because of our sale to close cycle times are so short we have an opportunity for certain customers to just go out into the market. If the if the latest favorable that day and just buy.

Phillippe Lord: Our rate locks and or buy down for them at that point of sale.

Hilla Sferruzza: I'll add one more point, Alan. This is a disclosure that comes out in the 10Q, so you'll see it, but we'll just give you guys a sneak peak. You guys know that we have about – at the end of last year, we had about 28,000 lots. And that some level of due diligence was still ongoing, but they were not counted in our actual lot totals because we hadn't committed. That number has actually increased from 28,000 to 34,000 just in the quarter while we grew our community count. The ability to find land that pencils is definitely not the issue.

Phillippe Lord: Could be cheaper than a forward commitment.

Hilla Sferruzza: Okay.

Speaker Change: Got it okay. Thanks a lot.

Hilla Sferruzza: Thank you. Your next question today is coming from Jay Mccanless from Wedbush Securities. Your line is now live.

Speaker Change: Hey, Thanks for taking my questions.

Speaker Change: Just just to clarify what you were saying earlier fleet are you guys seeing kind of the slow down in April foot traffic and demand that some of your competitors have talked about.

Alan S. Ratner: It's just the timing of when deals were closing.

Alan S. Ratner: No.

Alan S. Ratner: Great, that's really helpful. Thanks a lot, guys, good luck.

Alan S. Ratner: Okay.

Alan S. Ratner: And then.

Michael Jason Rehaut: Thank you. The next question is coming from Michael Rehaut from J.P. Morgan. Your line is now live.

Alan S. Ratner: In terms of pricing power.

Speaker Change: Where do you think youre getting better pricing power right now is it on the entry level first move up how how has that been trending.

Michael Jason Rehaut: Great. Thanks very much. Congratulations on the result.

Michael Jason Rehaut: They're also how has that been trending thus far in April.

Michael Jason Rehaut: So, first question, just around gross margins, would love to just get a sense, and I apologize if I kind of missed some of this earlier in the call, but just what drove the actual upside in the first quarter versus, you know, prior guidance? You know, I know, I think part of the review that was earlier was more just focused on year over year but was more interested in kind of zeroing in.

Michael Jason Rehaut: No Jay were mostly entry level at this point, although we are trying to source a more what we call one of them you land.

Michael Jason Rehaut: Which we're having some success doing so.

Michael Jason Rehaut: Primarily were entry level, so obviously the pricing power we experienced.

Michael Jason Rehaut: And.

Michael Jason Rehaut: Q1 was entry level pricing power I would say to give you some more information, it's more geographical and community by community.

Michael Jason Rehaut: The upside in the first quarter results versus your guidance and how that also flows through to the higher guidance for the full year. And then also on the gross margins, I believe I heard correctly that you expect the 25 gross margins to, at minimum, be similar to 24, and I just wanted to make sure that I heard that correctly as well.

Michael Jason Rehaut: And then other markets that are more.

Michael Jason Rehaut: Price sensitive we don't have as much.

Michael Jason Rehaut: Okay.

Speaker Change: Just the last question I had.

Michael Jason Rehaut: Maybe walk me through that from a capital allocation standpoint, because that seems like a pretty big burden to put on the company.

Phillippe Lord: Yeah, I'll let Hilla take the second part. So as we came into Q1 and guided to our Q1, we had a didn't have real visibility into the strength of the spring selling season. So it was early into January, and obviously, the spring selling season has been very, very strong. So, as you can see from our backlog conversion rate, we were able to convert a lot more move-in ready inventory than we had initially assumed.

Hilla Sferruzza: And especially with a cyclical industry. So maybe some of the thought process and why it makes such a big increase right now, especially with rates.

Hilla Sferruzza: At this point not having affected your business, but they might in the future.

Phillippe Lord: Okay.

Hilla Sferruzza: So we talked a lot about this.

Phillippe Lord: Dry organization as well as with our board and Steve <unk>, Our chairman.

Hilla Sferruzza: But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways not just buying back shares where we have a limited float, but also providing a dividend.

Phillippe Lord: And the demand for that move-in ready inventory was really strong, so we were able to set prices. And we didn't need to use as much of the rate lock dollars we had in our assumptions to get people into those mortgages and those homes. We obviously had assumed that rate locks were still going to be heavily utilized coming into the year, and they were much less utilized. So between backlog conversion and more leverage, ASP improvement, and then less incentive utilization, we obviously had a beat on our margin guide. And then I'll let Hilla talk about the guidance for the next 25.

Hilla Sferruzza: Thank the dividend signals to the street that we have tremendous conviction in the cash flow of our business.

Hilla Sferruzza: Yeah, so we're not yet providing guidance for 2025. We just wanted to clarify. We heard that there was maybe some confusion about the composition of our lot cost that's flowing through the financials in 2024, if it was going to be a little bit of the noise from the higher land development costs in 2024 and some also coming in 2025. And we just wanted to clarify that pretty much everything that's running through our financials these days is fully baked in at the higher land development spend. We don't have any more pre-COVID land.

Hilla Sferruzza: There's been a lot of conversations about the industry being related because our balance sheets are stronger while we've been paying a dividend tells you exactly how strong our balance sheet is.

Hilla Sferruzza: I think it's important to note that the dollars are all its a very impressive increase we just reiterated our Q2 to $2 5 billion annual land spend commitments, our dividends are around $100 million a year.

Hilla Sferruzza: So, for us, the level of lot cost is the percentage of revenue that you're seeing in our numbers in 2024. That's the new run rate until land development costs come down. So, there's not another shoe to drop with another reduction to gross margin from land. We've not given guidance on any other component of gross margin to 2025 just quite yet.

Michael Jason Rehaut: Okay, I appreciate that. And I guess maybe just also looking forward. You kind of talked consistently about an accelerated rate of growth at 25 and beyond. You're obviously looking for, you know, mid to high single digits this year. Without getting into too many details, I mean, my impression of higher growth would be something in the low double-digit range at minimum, and I'm just curious if that's the right way to think about that, or could it even be something in the teams, just trying to get a degree of magnitude when you talk about accelerated growth.

Speaker Change: Good morning.

Michael Jason Rehaut: I Wonder if you could go into.

Michael Jason Rehaut: Look the beat was very good both units and the margins I'm just trying to understand a little more specifically backlog I assume converted at the margins you.

Michael Jason Rehaut: Offered at the end of January.

Michael Jason Rehaut: And there is a certain spread there could you kind of talk about that applied spread I think I can do the math half year units were backlog have more closings.

Michael Jason Rehaut: So I'm trying to allocate additional spread.

Speaker Change: Yeah honestly, you know what we guided to.

Michael Jason Rehaut: And then what we delivered.

Michael Jason Rehaut: So if he came into the quarter.

Michael Jason Rehaut: With a backlog that's generally what we guided to but then we closed right at 148 decided about backlog. So we closed an extra 2000 houses in the quarter than we were expecting that's the spread.

Phillippe Lord: You're talking about 2025? Correct. Yeah. Yeah, I mean, we're obviously not prepared to give any guidance on 2025, but we're buying a lot of land, and anything less than 10% isn't really what we're targeting either, but we're just not prepared to guide to that at this point.

Phillippe Lord: Okay.

Phillippe Lord: So it seems like was it the spread or the implied margins for the spec actually improved quite a bit first what you expected plus the units correct.

Phillippe Lord: Absolutely as we came into January.

Michael Jason Rehaut: Fair enough. I appreciate it. Thank you.

Michael Jason Rehaut: Our ability and the demand for move in ready inventory that we were able to close in a quarter was really strong which allowed us to increase the pricing of that product as well as use less incentives on that product and the sheer fact that we closed as many homes allowed us to leverage and gain incremental benefit in the margin. So the <unk>.

John Lovallo: Thank you. The next question is coming from John Lovallo from UBS. Your line is now live.

John Lovallo: Hey guys, thank you for taking my questions. The first one is, you know, not to get nitpicky, but if we look at the midpoint of the 2024 delivery outlook, it's 14,750 homes. And if we back out the first quarter deliveries of 3507 and then the second quarter midpoint of 3,700, it would imply sort of average deliveries in the third quarter and the fourth quarter of around 3,771. So I guess, is the lack of sequential step-up in delivery more a function of the business becoming a bit more of an even flow from a production standpoint? Is it sort of a lack of available homes in the pipeline? Or is there something else that may be kind of leveling that growth?

Speaker Change: Combination of all of that has come right either agenda.

Speaker Change: So when we guide we're going to guide to what we know, but if theres a big inter quarter movement like we saw in the spring selling season, it's either going to benefit us.

Speaker Change: Or maybe not.

John Lovallo: Yeah, and the reason I ask is I think where you have I prefer looking at inventory so your backlog plus.

John Lovallo: Your spec units by.

John Lovallo: The math it seems like Youre doing like 27% gross margin on your backlog units and that implies roughly 300 bps.

John Lovallo: Yeah, so that's a great plan. I'm glad that you made it.

Hilla Sferruzza: Thanks, John. So, I think we alluded to it a little bit, but maybe we'll just put a finer point on it. I'll start, and Philippe can take us from there.

John Lovallo: Lower on your spec is that something that you would be willing to comment on.

Hilla Sferruzza: When you're selling and closing homes in the same period, the spring selling season results get pulled up. So, before Q4 was kind of our huge quarter, where what we were selling through May got delivered two and a half quarters later. Because now we're selling and closing by the inch or quarter, you're seeing that same fantastic volume just come up earlier in the year. It's still going to be a good Q4, but it's not really reflecting the spring selling season homes anymore. I'll let Philippe jump in as well. Yeah, that's right.

Speaker Change: I think we're getting really granular understand we're just kind of pull back from there I think that's kind of our.

Philippe: What we said a couple of times in the Q&A I think we're really comfortable with what we guided that was what we knew the incremental volume in the intra quarter improvement is what you're seeing come through in our actuals.

Philippe: Right No I think it's good I'm just trying to.

Philippe: We do too.

Hilla Sferruzza: Okay.

Philippe: Did you have another question.

Phillippe Lord: Yeah, that's right. I mean, we expect that. We will now see Q2 and Q3 being our biggest volume quarters, with Q4 being a little more modest, and then Q1 just depending on the spring selling season. So that's going to be kind of the new cadence of our business, unlike what it was before, where usually Q3 and Q4 were our biggest quarters.

Philippe: Thank you.

Philippe: Operators got it. Thank you we've reached end of our question and answer session I'd like to turn the floor back over to fleet for any further or closing comments.

Speaker Change: Thank you operator, I'd like to thank everyone, who joined this call today for your continued interest in Arizona. We hope you have a great rest of your day and a great weekend. Thank you.

Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.

Phillippe Lord: Yeah, that makes a lot of sense. Okay, and then, you know, you guys returned 83 million to shareholders in the first quarter, and you generated a similar level of cash from operations. I mean, as we move forward here, can we sort of think of matching cash flow with, you know, repos and dividends over the next few quarters, particularly considering no real debt due until 2025?

John Lovallo: Yeah, I think that it's exactly a function of cash. Like Phillippe mentioned earlier, the timing of land development acquisitions is kind of just based on when deals are closing. So it's not necessarily a function of operating cash flow, but it is a function of prior year profitability. So if you look at it, we're on target to do, like, in the 20s of last year's net income in return of capital to shareholders. That's kind of more our target rather than the timing of when a deal is closing on the land side.

John Lovallo: understood. Thanks very much, guys.

Susan Marie Maklari: Thank you. Our next question is coming from Susan Maklari from Goldman Sachs. Her line is now live.

Susan Marie Maklari: Thank you. Good afternoon, everyone.

Susan Marie Maklari: My first question is, you know, you've commented on the target of taking the ASP down over time. The guide does imply that, sequentially, we will see a bit of a slowdown in there, but I guess when you think about that relative to the pricing power and the level of demand that you talked about on the ground, how are you thinking about those two factors coming together? And any thoughts on how that ASP will come through in the longer term?

Phillippe Lord: Yeah, the ASP, our forward-looking ASP guidance is predicated on the land revise. So for buying less expensive lots that can allow us to produce our product in a more affordable part of the market long term, which is what our core strategy is, that's driving VHP decline. But that doesn't mean we're not taking pricing when the market is elastic in that affordable segment of the market, which it has been and was very strong in Q1. So there are two different concepts. One is the land we're buying, and the other is what the market allows us to do.

Susan Marie Maklari: Okay. All right. That makes sense. And then I guess, you know, can you just comment a bit on what you're seeing in terms of just overall cycle times and input costs in terms of, you know, some of the sticks and bricks and anything there as we think about the forward quarters?

Phillippe Lord: Yes, Hilla said in her opening comments, cycle times are the best they've been in a long time. We're kind of where our target is. Production capacity is really stable. We're hitting our timelines. I'm not sure how much more there is, but the capacity is real strong.

Phillippe Lord: So if there's more to take out of our cycle times, we will. And then direct costs are also really quite stable. We have, given the size of our business at this point, really strong relationships that are producing a great cost structure for us. Lumber's ticked up a little bit, but we've been able to offset that in other areas and categories of the business. So as we look out into 2024, we're modeling stable cycle times and stable direct costs.

Susan Marie Maklari: Okay. All right. That's great color. Thank you, and good luck with everything.

Susan Marie Maklari: Thank you. Our next question today is coming from Alex Barron from the Housing Research Center. Your line is now live.

Alex Barron: Yes, thank you. I was hoping you could elaborate a little bit on your average buyer. Well, first of all, what percentage of the buyers are actually first-time buyers? And what does that average buyer, entry-level buyer look like? What's their FICO? What's their down payment, what's their average income, that type of thing.

Phillippe Lord: Hilla's pulling up some more details for you, so just give us one second, but I'll kind of reiterate what Hilla said earlier. Our FICA scores, our DTIs, everything's pretty much the same as it was. It's been the same for a long time. We're obviously targeting a more qualified entry-level buyer, but for the most part, these are their first homes. But they have really high income levels, and they're looking for as nice a home as they can buy at a certain price point. But hang on one second, and Hilla will tell you the exact metrics.

Hilla Sferruzza: Yeah, our first time buyer, so they don't declare themselves as a first time buyer; we can only look at their past data and back into whether they're a first time buyer or not. But our first time buyer is about two-thirds of our business right now.

Alex Barron: Okay, and I was kind of interested just to see what type of income level these people had.

Hilla Sferruzza: Yeah, I don't know if we're sharing the income, but you can probably back into it because the DTIs are averaging 41, 42, and we're sharing that the LTV is in the mid-80s, so if you kind of take our ASP back into what the loan amount is, with an 85% LTV, you can probably back into their monthly, their average monthly income. Generally, yeah.

Alex Barron: Okay, I'll go ahead and do that.

Phillippe Lord: We're not seeing our particular consumer not be able to qualify and afford our home. We don't have to do rate buy-downs and rate locks to qualify them. It's more of a psychological thing; we want a lower rate on a third-year mix. It's an incentive versus a qualification.

Alex Barron: Got it, and then if you can elaborate on a comment you made about the cost of incentives being lower and then a forward commitment if it was like a short close. If you can elaborate on that, because my thought was that the forward commitment was supposed to be the lower form.

Phillippe Lord: So a forward commitment, there's lots, we don't need to get into all the dynamics of how a forward commitment works; we can talk about that offline, but there are a lot of benefits to using a forward commitment. You can bulk buy and get some lock-in rate. It gives you an advantage that if rates are moving against you during that period of time, you have that amount locked in; you're not trying to lock it in So we have an opportunity, because our sale-to-close cycle time is so short, we have an opportunity for certain customers to just go out into the market if the rate is favorable that day and just buy a rate lock and or buy-down for them at that point of sale. That could be cheaper than a forward commitment.

Alex Barron: Got it. Okay. Thanks a lot.

Jay McCanless: Thank you. The next question today is coming from Jay McCanless from Wedbush Securities. Your line is now live. Hey, thanks for taking my questions.

Jay McCanless: Thanks for taking my questions. Just to clarify what you were saying earlier, Phillippe, are you guys seeing kind of the slowdown in April foot traffic and demand that some of your competitors have talked about? No. Okay. And then, in terms of pricing power, where do you think you're getting better pricing power right now? Is it at the entry level, first move up? How has that been trending? And, I guess also, how has that been trending thus far in April?

Phillippe Lord: You know, Jay, we're mostly entry level at this point, although we're trying to source some more of what we call 1MU land, which we're having some success doing. Primarily, we're entry level. So obviously, the pricing power we experienced in Q1 was entry-level pricing power. I would say, to give you some more information, it's more geographical and community by community. Certain communities, certain markets are really strong, and there's a lot of pricing power. And then other markets that are more price-sensitive, we don't have as much.

Jay McCanless: And then just the last question I had, with the pretty large increase that the board put in with the dividend. Maybe walk me through that from a capital allocation standpoint because that seems like a pretty big burden to put on the company, especially in a cyclical industry. So maybe some of the thought process and why such a big increase right now, especially with rates, which at this point have not affected your business, but they might in the future.

Phillippe Lord: So we talked a lot about this throughout our organization, as well as with our board and Steve here, our chairman. But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways, not just buying back shares where we have a limited float but also providing a dividend. We think the dividend signals to the street that we have tremendous conviction in the cashflow of our business.

Phillippe Lord: Our operating model has dramatically changed from where it was seven years ago. You can see our backlog conversion. We're generating much stronger cash flow quarter to quarter, and so we felt strongly that that was the signal we needed to send to the street that we believe our operating model, our business, is less cyclical than it was before. There's been a lot of conversations about the industry being re-rated because our balance sheets are stronger. Well, we think paying a dividend tells you exactly how strong our balance sheet is.

Hilla Sferruzza: I think it's important to note that the dollars, while it's a very impressive increase, we just reiterated our $2 to $2.5 billion annual land spend commitment. And our dividends are around $100 million a year. So I think just to put everything in perspective, that's a pretty small portion and a pretty small commitment for us to be making of the entire capital outflow for the company.

Jay McCanless: Okay, great. Thanks for taking my questions.

Jay McCanless: Thank you. The next question is coming from Ken Zener from Seaport Research Partners. Your line is now live.

Kenneth Robinson Zener: Good morning, everybody.

Kenneth Robinson Zener: I wonder if you could go into...

Kenneth Robinson Zener: Look, the beat was very good, both the units and the margins. I'm just trying to understand a little more specifically. Backlog, I assume, was converted at the margins you offered at the end?

Phillippe Lord: So it's and there's a certain spread there. Could you kind of talk about that?

Phillippe Lord: Transcripts provided by Transcription Outsourcing, LLC. So try to understand the initial spread. Yeah, honestly, you know what we guided to and then what we delivered. So if you came into the quarter with a backlog, that's generally what we guided to. But then we closed 148% of that backlog, so we closed an extra 2,000 houses in the quarter than we were expecting. That's the spread. So it seems like, was the spread on the implied margins for the spec actually improved quite a bit versus what you expected, plus the units? Correct? Absolutely not.

Phillippe Lord: As we came into January, our ability and the demand for move-in ready inventory that we were able to close inter-quarter was really strong, which allowed us to increase the pricing of that product, as well as use less incentives on that product.

Phillippe Lord: And the sheer fact that we closed so many homes allowed us to leverage and gain incremental benefit on the margin. So, the combination of all of those coming together... Right?

Hilla Sferruzza: So when we guide, we're going to guide to what we know. But if there's a big inner corridor movement, like we saw in the spring selling season, it's either going to benefit us or maybe not. Yeah, and the reason I ask is I think where you have, I prefer looking at inventory. So your backlog plus, you know, your spec units, but it's see, I do the math, it seems like you're doing like 27% gross margin on your backlog units, and it applies roughly 300 bits lower on your spec. Is that something that you would be willing to comment on?

Kenneth Robinson Zener: I think we're getting really granular, so we're just going to pull back from there. I think that's kind of what we said a couple of times in the Q&A. I think we're really comfortable with what we guide. That was what we knew. The incremental volume and the intra-quarter improvement is what you're seeing come through in our actual numbers. Right? No, I think it's good. I'm just trying to... We do, too.

Kenneth Robinson Zener: Right. No, I think it's good. I'm just trying to...

Operator: Operator, is that it? Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Phillippe for any further or closing comments.

Phillippe Lord: Thank you, operator. I'd like to thank everyone who joined this call today for their continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you.

Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.